Working Paper No The myth of employment enhancing flexible labour markets. William Mitchell and Joan Muysken 1.

Transcription

1 Working Pper No. 1- The myth of employment enhncing flexible lbour mrkets Willim Mitchell nd Jon Muysken 1 November 1 Centre of Full Employment nd Equity The University of Newcstle, Cllghn NSW 3, Austrli Home Pge: Emil: coffee@newcstle.edu.u 1

2 1. Introduction Mitchell nd Muysken () nlysed why infltion fell in Austrli in the period leding up to the finncil crisis despite sustined nd strong employment growth. The question of interest ws why wge pressures hd been reltively benign? The underlying proposition ws tht rise in underemployment since the erly 199s hs chnged the wge setting process in the lbour mrket nd employers use this slck s mens of disciplining wges growth nd djusting to the flux nd uncertinty of the business cycle. In other words they considered the Phillips curve reltionship hd ltered nd within-firm slck ws n dditionl disciplinry force on infltion. This pper extends tht work nd rgues ginst the notion tht when unemployment is low, dditionl government expenditures will dd to infltionry pressure nd hence hrm the economy. This fllcy follows from the notion tht low unemployment indictes tht the economy is close to full cpcity: In tht cse, dditionl government expenditures will compete for productive resources nd drive up prices nd wges. This resoning is consistent with the trditionl Phillips curve, where unemployment hs negtive impct on infltion nd nturl rte of unemployment is consistent with bsence of (ccelerting) infltion. The resoning bove, however, ignores fundmentl shifts in the lbour mrket tht hve been tking plce in the lst three decdes. The wy lbour mrkets operte shifted significntly in the erly 19s, in tndem with the rise of Regnomics nd Thtcherism nd culminted, in policy sense with the relese of the OECD Jobs Study in 199 (Mitchell nd Muysken, b). Mitchell nd Muysken (b) demonstrte tht on conceptul nd empiricl grounds, the OECD Job Study prdigm filed to deliver on its promise to generte full employment nd enhnced skill levels. This prdigm underpinned the demise of full employment nd focus by most ntionl governments on ctive lbour mrket progrms, or full employbility. The pursuit of full employbility hs been chrcterised by myrid of trining progrms, coercive welfre-to-work policies nd withdrwl of government responsibility for ensuring enough jobs re generted to mtch the preferences of the lbour force. The supply-side emphsis of the OECD Jobs Study ws ssocited with strong clls for deregultion of lbour mrket, llegedly to increse the flexibility nd efficiency of the process of mtching supply nd demnd. It ws erroneously climed tht the persistent unemployment ws structurl in origin (rther thn demnd-deficient) nd tht vrious rigidities hd to be removed s n effective resolution. The clim ws tht by incresing lbour mrket flexibility, resources could be used more efficiently nd hence economic growth nd prosperity would be enhnced. As consequence the nture of reltions in the lbour mrket shifted fundmentlly. Prior to the erly 19s, lbour mrket were chrcterised by high proportions of wellpid permnent jobs with strong dismissl protection nd strong trde union involvement. Since then, lbour mrkets hve become more frgmented nd union influence hs become weker. Permnent jobs hve been replced by temporry jobs in vrious guises with working hours within these ltter jobs becoming more flexible. Additionlly, within prt-time employment the trend hs been towrds incresing csulistion of work nd this hs led to widening of py differentils. While there hs been no forml study tht hs shown tht these tendencies hve led to higher economic growth nd prosperity, our concern is focused on how these developments hve ffected the wge determintion process. We re specificlly

3 interested in how the lbour mrket trends hve undermined the resoning behind the trditionl Phillips curve. By seeking n understnding of the wy the lbour mrket impcts on infltion, we im to provide frmework for considering the impct of dditionl government expenditures in times of low infltion. This pper ims to ddress the first prt of this story by nlysing incresed lbour mrket flexibility in terms of the shift from permnent to temporry work nd selfemployment, nd the impct on hours worked. We discuss three importnt spects of tht trend. First, the reltionship between firms nd workers hs chnged fundmentlly. Trditionlly, the ggregte rte of unemployment could be seen s thret to workers which is externl to the firm - notwithstnding tht the thret of unemployment ws often hrd to implement). However, s result of the incresed flexibility, it is now reltively esy for firms to modify the number of hours worked or to terminte temporry contrcts. Therefore firms hve gined significnt new cpcity to djust to business cycle fluctutions which is internl to their opertions nd which they cn use to discipline wge demnds from their work forces. The shrp rise in underemployment in mny economies is evidence of this incresing internl slck. In Section, we develop model to explin this phenomenon. Second, the shift from permnent to temporry work hs not been grdul process, but hs proceeded in jumps where these shrp rises hve been induced by recessions. After ech recession it ppers tht the incresed flexibility which occurred during the period of low ctivity is locked in nd the trend continues from this higher level. We hypothesise tht recessions fcilitte prdigm shift, which llows employers to intensify the underlying shifts tht re occurring s result of decresed union power nd incresed globlistion. Once the economy is in recession, some criticl threshold is pssed, fter which it is hrd to turn the clock bck. As result n erosion of previously held norms becomes ccepted. In this pper, we identify nd nlyse such shifts for Netherlnds. Third, it ws rgued in the OECD Jobs Study nd countless supporting documents nd reserch ppers tht the incresed lbour mrket flexibility mrket would led to more efficient lbour utilistion. Mitchell nd Muysken (b) show tht, in fct, this hs not been the cse for OECD ntions. In this pper we focus on the Dutch experience. The pper is lid out s follows. Section presents the forml model nd develops series of testble hypotheses. Section 3 exmines recent trends in the Dutch economy in reltion to these hypotheses. Concluding remrks follow.. Permnent versus temporry jobs nd the implictions for hours worked.1 Overview There is mple evidence of n incresing shre of temporry jobs reltive to permnent jobs following the wves of lbour mrket deregultion in the lte 19 s nd 199 s (OECD, ). The motivtion for deregultion of working conditions ws to promote economic growth nd increse employment (see OECD, 199). Mitchell nd Muysken (b) show how the supply-side gend promoted by the OECD hs hd huge influence on the policy in mny Western economies. The intention ws lso to enhnce ccessibility to the lbour mrket for unemployed individuls nd to provide them with 3

4 better job prospects, through mesures such s fcilitting temporry work greements nd decresing firing costs for permnent workers. However, the success of these reforms hs been quite limited: n incresed incidence of temporry employment, no cler indictions tht the stepping-stone theory from temporry to permnent jobs ws vlidted nd no cler employment growth (see Khn, 1). In ddition to the lck of empiricl support for the policies, severl ppers lso questioned the reform gend from theoreticl perspective. Both Blnchrd nd Lndier () nd Chuc nd Postel-Veny () rgue tht while mking temporry work more fesible will lower the costs of offering jobs, the consequence lso is higher turnover on the lbour mrket. The ltter my led to higher unemployment. In similr vein, Wsmer (1999: 35) rgues tht firms re more willing to use temporry contrcts when growth is low. Firms then prefer high turnover workers with low turnover costs. However, two spects tht hve been lrgely ignored in both the theoreticl work nd in the vst mount of empiricl literture nlysing the reforms re: 1. The cyclicl vrition in the trnsition of permnent to temporry jobs this trnsition is ccelerted during boom; nd. Tht lbour mrket djustment to demnd shocks does not only tke plce through the shift from permnent to temporry work, but lso through n incresed flexibility of working hours within temporry jobs. During periods of high ctivity employers will tend to increse the number of hours worked per worker, wheres they decrese them during recessions. The consequence of these cyclicl vritions, which overly the trend towrds more csul work, is tht underemployment provides firms with significnt djustment cpcity, in the sme wy tht unemployment did in the pst. We develop smll conceptul model in order to get better understnding of the incresing incidence of temporry jobs reltive to permnent jobs, the cyclicl vrition therein, nd the pro-cyclicl vrition in hours worked. However, we choose not to follow the theoreticl pproch mentioned bove, which employs generl equilibrium model in the trdition of Mortensen nd Pissrides (199). Although n dvntge of tht pproch is tht closed model is presented, there re severl serious drwbcks of tht line of resoning for the nlysis we re interested in (see Mitchell nd Muysken, ). First, there is no role for demnd shocks nd it is cler tht these ply n importnt role in the type of problems we re nlysing. Second, there re mny institutionl chrcteristics in the economy which cnnot be properly ccounted for in such n pproch but which re nonetheless importnt for proper understnding of the impct of demnd shocks. For exmple, Ohnin et l (9) identify both institutionl spects nd gender differences. Third, employers nd workers behviour re nlysed in symmetricl wy, which seems highly implusible to us given the disprte power tht ech hs in the lbour mrket reltionship. For tht reson, we will construct employers s mking decisions bout the nture of the job they offer, while workers will be considered to ccept ny job offer tht exceeds their reservtion wge. We will use prtil equilibrium pproch, focusing on firm behviour in choosing between permnent nd temporry positions nd the choice of the number of hours worked in rection to demnd shocks. In our nlysis, we follow the model developed in Khn (1), where he explins tht employers will be more inclined to choose temporry jobs insted of permnent jobs

5 during recession thn in boom. The intuition is tht workers re on verge more productive during boom compred to recession. The incidence of workers with productivity below given wge rte therefore is higher during recession. This will induce employers to opt more for temporry jobs, since they then cn weed out the unproductive workers. Additionlly, Khn models the impct of firing costs on the choice between temporry nd permnent jobs, both during recessions nd the expnsionry phse. In line with the intuition bove he finds tht these costs re more importnt during recessions. We summrise Khn s nlysis in the Section.. In Section.3, we then modify the model to include hours worked s vrible tht the employer cn use in cse of temporry employment. We show tht employers will cut the mount of hours worked per worker during recession. The result is tht during recession more temporry jobs will be creted reltive to permnent jobs thn during boom, nd tht these temporry jobs will consist of less hours worked compred to boom.. A simple model of firm behviour A crucil ssumption in Khn s (1) model is tht during n expnsion workers productivity will be higher on verge thn during recession. Surprisingly enough Khn does not elborte upon this ssertion despite it being crucil for his model. A typicl explntion for this phenomenon would be Verdoorn s Lw (for recent ppliction see Stilinos nd Tsgdis, 9). In line with the bove resoning, we ssume tht workers productivity e is uniformly distributed between nd 1 during recession nd between nd > 1 during n expnsion. The uniform distributions re L(e) nd H(e), indicting periods of low nd high ctivity, denoted by L nd H respectively. 1 We will first nlyse wht this implies for permnent jobs nd next compre tht to the cse of temporry jobs. We ssume tht the firm is confronted with centrl brgined wge W, which is invrint over the cycle. Moreover, for ske of simplicity the expected wge is ssumed to be equl to W for both permnent nd temporry workers. Finlly we focus on firm behviour during one period only. Extending the nlysis to multi-period study will mke the conclusions stronger. Permnent jobs A permnent job is chrcterised by set-up costs h P nd firing costs c. Workers re rndomly drwn from the uniform distribution. Given centrl brgined wge W, we ssume tht only workers re kept with productivity e > W c. However, upfront pyments M hve to be mde to entice workers to ccept the jobs, since they run the risk of being fired. The profits for the firm on permnent job V Pi, where i=l,h indictes the periods of low nd high ctivity, respectively, re given by: V PL = h P M PL + 1 W c (e W)dL(e) c W c dl(e) (1) V PH = h P M PH + W c (e W)dH(e) c W c dh(e) (1b) 1 This implies tht dl(e) = 1.de nd dh(e) = (1/).de. 5

6 The upfront pyments to entice workers to ccept the jobs, M PL nd M PH respectively, re such tht the expected wge of the workers equls W: M PL = W W M PH = W W 1 W c W c dl(e) b dh(e) b W c W c dl(e) = (W c)(w b) () dh(e) = ( 1 )(W c)(w b) (b) One sees tht when c = W the firing costs re prohibitive, tht is, the contrct becomes permnent nd there re no upfront costs needed to ttrct workers. Moreover, the wge compenstion is lrger during recession, since the risk of unemployment then is greter. Substituting Eqution () in Eqution (1) shows tht the profits for ech permnent job re: V PL = h P +.5 W +.5(W c)[b c W] V PH = h P +.5 W +.5 (W c)[b c W] (3b) The gin of being ble to fire workers t costs c < W follows from the lst prt of Equtions (3) nd (3b), respectively. These gins re positive s long s b > (c + W)/ we ssume this to be the cse. An interesting observtion (OBSERVATION 1) is tht the gin of firing unproductive workers is lrger during recession, since > 1. Temporry jobs Initilly in temporry contrct the firm cn observe the productivity of the worker, but obtins no output. The set-up costs re h T nd M TL nd M TP re the upfront pyments firms must py to ttrct temporry workers. The firm will employ workers only when their productivity is t lest the centrl brgined wge W. The profits on temporry job then re given by: 1 V TL = h T + (e W)dL(e) W V TH = h T + (e W)dH(e) W M TL = h T +.5 W +.5W M TL (3) () M TP = h T +.5 W +.5 W M TP (b) The upfront pyments M TL nd M TP re such tht workers obtin the expected wge W: 1 W M TL = W W dl(e) b dl(e) = W(W b) (5) W W M TH = W W dh(e) b dh(e) = ( 1 )W(W b) (5b) W Substituting Eqution (5) in Eqution () shows tht temporry contrct is more dvntgeous for the firm during recession thn during n upswing (OBSERVATION ). The intuition for this result is tht the incidence of low productive workers, which cn dismissed without ny cost, is higher in recession. Khn (1) only nlyses the cse where permnent workers cnnot be fired. In our model we show tht when we llow for firing costs, similr results re found. So the gins for the firm of employing temporry person insted of permnent position re: V TL V PL = h P h T + c[b.5c] () V TH V PH = h P h T + 1 c[b.5c] (b) One sees from Eqution () tht temporry workers re more profitble for the firm thn permnent workers, ssuming tht set-up costs for permnent workers t lest equl

7 those for temporry workers. We know tht b.5c holds becuse we ssumed tht b > (c + W)/. In this respect one cn interpret differences in set-up costs to lso reflect productivity differentils between permnent nd temporry jobs. Assuming both types of set-up costs to be distributed over the whole rnge of jobs, this then lso explins why some permnent jobs re replced by temporry jobs nd others not. Another observtion from Eqution () (OBSERVATION 3) is tht the gin of replcing permnent by temporl workers is lrger during recession, since > 1. This is consistent with both erlier observtions. Also, s consequence of the possibility to fire workers, the frction of permnent jobs lost in recession (W c), exceeds tht lost in n expnsion (1/)(W c). This is similr to the point mde by Blnchrd nd Lndier () nd Chuc nd Postel-Veny (), lbeit for different resons..3 Hours worked A frequently observed phenomenon is tht temporry jobs re lso chrcterised by flexible hours when there is slck, the employer cn reduce the working hours of the worker. We include tht feture in the model by llowing ech worker to work flexible number of hours. Insted of ssuming fixed productivity per worker, we llow productivity to depend on hours worked h. Tht is, we ssume the productivity of worker who works h hours to be equl to e.g(h), while we ssume e to be distributed uniformly, s before. We ssume declining mrginl productivity of hours, reching mximum totl productivity per worker t h mx hours. When we introduce these ssumptions in the model nd interpret W s wge per hour, we find the profits on temporry job to be given by: V TL = h T + V TH = h T + 1 Wh/g(h) Wh/g(h) (e. g(h) W. h)dl(e) W OL = h T +.5g(h) hw +.5 (hw) g(h) (e. g(h) W. h)dh(e) W OH = h T +.5g(h) hw +.5 (hw) g(h) W OL W OH Note tht compred to the previous nlysis we now require e.g(h) > W.h insted of e > W. We ssume tht employers will set the number of hours worked such s to mximize profits per worker. Moreover, to fcilitte the nlysis, we ssume g(h) = α[h h /(h mx )]. This specifiction is consistent with declining mrginl productivity of hours, together with mximum productivity t h mx. Then we find: dv TL = α 1 h W dh hmx W + α [ hmx h mx h ] = (7) (b) (9) dv TH dh = α 1 h W hmx W + α [ hmx h mx h ] = Since > 1, this implies tht employers will increse the number of hours worked in the temporry job during n expnsion. Or, lterntively, decrese the number of hours (9b) 7

8 worked during recession (OBSERVATION ). Also, s one might expect, employers will decrese the working time per job when the wge rte is higher. A forml proof for these sttements is provided in the Appendix. Finlly, since the possibility to mnipulte hours of work mkes temporry jobs even more ttrctive for employers, these jobs will be even more preferred to permnent jobs thn in the previous nlysis.. Summry of model The previous nlysis ws bsed on the behviour of typicl firm. Aggregte behviour follows when we llow for distribution of firms over set-up costs h T nd h P. When tht distribution is given, our model shows tht declining trend in firing costs will led towrds rising trend in temporry jobs: this is consistent with our first stylised fct. The presence of demnd shocks will lso led to more temporry jobs being creted reltive to permnent jobs during recession thn during boom (second stylised fct). Further, these temporry jobs consist of less hours worked compred to the sitution tht would be found t the top of the cycle (third stylised fct). An element of the nlysis which we hve not elborted is tht the net employment gins of these developments re not necessrily positive. As is shown by others, the incresed turnover on the lbour mrket implied by the trnsformtion of permnent into temporry jobs hs negtive employment impct. The net-result is uncler. The model thus provides severl testble hypotheses bout the wy the lbour mrket responds to the business cycle. We consider these implictions s precursor to following pper which nlyses the impct of broder lbour mrket slck for the infltion generting process. By wy of summry, the hypotheses of interest tht we exmine in Section 3 re: Firms shed full-time jobs to djust their ctivity levels during mjor cyclicl downturn. Recessions reinforce the trend wy from full-time employment. Prt-time employment resists the cyclicl decline in economic ctivity ssocited with recessions. Firms use prt-time employment to mintin ctivity while gining djustments (in terms of hours nd persons) vi full-time job shedding. Flexible employment nd short-hours employment is used during recessions by firms s n hours-buffer to meet the flux nd uncertinty of ggregte demnd. 3. Employment nd hours worked in the Netherlnds, Trends in the Dutch lbour mrket Figure 1 shows tht the nnul number of hours worked per person hs decresed stedily over the smple period (199-9) from bout 15 hrs/yer in 199 to bout 135 hrs/yer in 9. Prt of this trend cn be scribed to similr decline in the number of hours per full-time job, from bout 5 hrs/yer in 199 to round 173 since the mid-199s.

9 Figure 1 Averge nnul hours worked per person nd per full-time job, Netherlnds, Averge hours worked p Annul hours worked per person Annul hours worked per full-time job Source: CPB, Netherlnds. In ddition, the proportion of full-time equivlent jobs in totl employment hs decresed over the smple period in n lmost liner fshion (see Figure ). Figure Rtio of full-time equivlent employment to totl employment, Netherlnds, Proportion Source: CPB, Netherlnds. Rtio of full-time employment to totl Figure 3 shows the rtio of prt-time employment to totl employment for the Netherlnds from 199 to 9. Underlying the decline in the number of full-time hours per person is the stedy increse in prt-time employment in the Netherlnds, from 15.7 per cent of employed workers in 199 to.5 per cent in 9. 9

10 Figure 3 Prt-time employment s percent of totl employment, Netherlnds, Per cent of totl PT1 PT Source: CPB, Netherlnds. We use two sources for full-time nd prt-time employment. The CBS published dt from 199 to 199 in the Arbeidsrekeningen (PT1) ctegory, which lso includes flexible employment, which we llocted to prt-time employment. From 197 the CBS published dt for full-time nd prt-time (PT) employed workers. Together with n incresing incidence of prt-time employment we lso observe n incresing shre of so-clled flexible employment, which is defined s hving contrct of limited durtion nd/or flexible number of working hours (CBS, Ntionl Accounts). Figure shows the rtio of flexible employment to totl employment between 199 nd 9. The rtio rose from 3.9 percent in 199 to 1 per cent in 9 Figure Shre of flexible employment in totl employment, Netherlnds, Per cent Shre of flexible employment in totl Shre of flexible in totl (LFS) Source: CPB, Netherlnds (prior to 1997) nd Eurostt Lbour Force Survey (LFS) (post 1997). Flexible work hs lso become lrger proportion of prt-time employment rising from 5 per cent in 199 to over 3 per cent in 9 (CPB, Netherlnds). There hs lso been n increse in the proportion of Dutch workers employed for less thn 1 hours per week lthough tht trend hs reversed since The lrge rise in the erly 19s ws 1

11 ssocited with mjor recession in the Netherlnds in It is cler tht firms incresed the number of jobs vilble which provided less thn 1 hours per week. Eurostt dt on involuntry prt-time work shows similr pttern with lrge hump during the recession yers of 19 nd 193. This supports our view tht this djustment ws driven from the demnd-side nd imposed on the workers. Underemployment stedily fell gin s growth resumed. Figure 5 Workers employed less thn 1 hours per week s percent of totl employment, Netherlnds, Per cent Shre of persons working less thn 1 hours Source: CPB, Netherlnds. Figure helps us understnd the declining trend in since the erly 199s in employment of less thn 1 hours per week. It is cler significnt mount of the net employment cretion in the Netherlnds fter the first OPEC oil crisis ws t the low end of the hours distribution s full-time work opportunities declined. Figure Annul growth in employment components by hours, Netherlnds, Per cent Source: CPB, Netherlnds. Annul growth in employment - less thn 1 hours per week Annul growth in employment - more thn 1 hours week 11

12 In the 199s this trend reversed with more prt-time jobs offering more thn 1 hours per week being creted reltive to those offering less thn 1 hours per week. Overll, there hve been lrger number of prt-time jobs replcing full-time work over this period. Finlly, the incresed incidence of flexible employment lso implies nd incresing shre of self-employed. Figure 7 shows tht the shre of self-employed in totl employment hs risen since 199. The dt is not vilble prior to 199. The vilbility of this dt series coincides with the reltively recent phenomenon of persons now working in jobs which were previously deemed to be offered by n employer but hve since been outsourced (see vn Es nd vn Vuuren, 1). Figure 7 Shre of self-employed (ZZP) in totl employment, Netherlnds, Per cent Shre of self-employed in totl employment Source: CPB, Netherlnds. In summry, the trends in the Dutch lbour mrket re rther strk. There hs been There hs been decline in hours worked per person overll nd for those engged in full-time employment. The rtio of full-time equivlent employment to totl employment hs systemticlly declined since 199. Prt-time employment hs risen s percent of totl employment since 199 nd now ccounts for nerly 5 per cent of totl employment. Shre of flexible employment in totl employment hs risen drmticlly since 199. More prt-time workers re now engged in flexible employment. There hs been rise in the proportion of workers employed for less thn 1 hours per week. The proportion of self-employed workers hs risen since

13 3. Cyclicl behviour of the Dutch lbour mrket In Section 3.1 we documented the underlying trends in the Dutch lbour mrket. However, the model we developed in Section describes the lbour mrket behviour during recessions nd growth periods. In this section we consider some of the evidence relting to the cyclicl behviour of the Dutch lbour mrket. Following the nlysis of the trend developments, we first look t the decomposition: hours person = hours fte job fte job person We use this decomposition in reltion to Figures 1 nd bove which show trend movements in verge nnul hours worked per person nd per full-time job (Figure 1) nd the rtio of full-time equivlent employment to totl employment (Figure ). Figure shows the reltionship between the growth rte of hours worked per full-time job nd rel GDP growth in the Netherlnds from 197 to 9. There is no cler cyclicl pttern, lthough one might expect pro-cyclicl pttern. The likely reson for this result is tht the decrese in hours per full-time equivlent job is structurl phenomenon. A better indiction of cyclicl djustments might be provided by the number of full-time equivlent jobs per person, since tht indictes chnges in lbour mrket flexibility. Figure Hours worked per full-time job nd rel GDP growth, Netherlnds, Rel GDP growth (% p) Full-time hours growth (% p) Growth in full-time hours per person (% p) Rel GDP growth (% p) Figure 9 shows the reltionship between the chnging rtio of full-time equivlent employment to totl employment in persons (percentge points left-xis) nd rel GDP growth (% per nnum) for the period 197 to 9. While the overll trend in of full-time equivlent jobs per person hs been negtive over this period (Figure ), the rte of decline hs fluctuted in very cler pro-cyclicl mnner. Tht is, downturn generted stronger decline in the number of full-time hours per person. This is consistent with our model. 13

14 Figure 9 Chnge in full-time equivlent jobs per person nd rel GDP growth, Netherlnds, Percentge points (full-time rtio) Per cent (GDP growth) Chnge in rtio of full-time to totl employment (%) GDP growth (%) Source: CPB, Netherlnds. Underlying the cyclicl behviour of full-time equivlent jobs per person is the cyclicl flexibility of full-time nd prt-time employment. An nlysis of the dynmics of fulltime employment shows consistent decline, in line with the incresing shre of prt-time employment (see Figure 3). However, in terms of cyclicl behviour, Figure 1 shows us tht the recessions in 191, 1993 nd resulted in disproportionlly strong decline in full-time employment. This cyclicl pttern is lso observed in Austrli (Mitchell nd Muysken, ). Recessions clerly hve been used to shed full-time employment nd replce the jobs by prt-time employment jobs which reinforces the underlying trend towrds incresed frctionlistion of employment. The trnsition from full-time to prt-time jobs is gin consistent with our model in Section. Figure 1 Full-time employment growth nd rel GDP growth, Netherlnds, FT1 nd FT growth (% p) Rel GDP growth (% p) Full-time employment growth growth (% p) - FT1 Full-time employment growth growth (% p) - FT Rel GDP growth (% p) Source: CPB, Netherlnds. See notes for Figure 3 bout FT1 nd FT. 1

15 Figure 11 shows tht the growth of prt-time employment is lso typiclly pro-cyclicl, lthough it is cler tht this occurs with lg such tht erly in downturn prt-time employment continues to grow. Moreover, there is no disproportionlly strong decline in prt-time employment during the shrp recessions of 191, 1993 nd, which is consistent with the observtion tht these recessions clerly hve been used to shed fulltime employment nd replce the jobs by prt-time employment jobs (see lso Mitchell nd Muysken, for consistent Austrlin evidence). Figure 11 Prt-time employment growth nd rel GDP growth, Netherlnds, Per cent GDP growth Prt-time employment growth (PT1) Prt-time employment growth (PT) Source: CPB, Netherlnds. See notes for Figure 3 bout PT1 nd PT. Finlly, the incresed incidence of flexible employment lso exhibits pro-cyclicl chrcteristics (see Figure 1) nd suggests tht firms use these jobs s buffer to keep some ctivity going while sles re flling. Figure 1 Flexible employment growth nd rel GDP growth, Netherlnds, % per nnum Per cent per nnum Flexible employment growth (left-xis) Rel GDP growth (%p) Source: CPB, Netherlnds. Our model in Section suggests tht firms lso use short-hours jobs (less thn 1 hours week) s mens of djusting to cyclicl fluctutions in sles. So when demnd is 15

16 flling, firms shorten the prt-time hours they re prepred to offer s they shed fulltime jobs. Figure 13 shows tht growth in employment of jobs offering thn 1 hours per week exhibited clerly countercyclicl behviour in the 19s, which consistent with our model. It is cler tht the 19-3 recession ws very significnt downturn in the Netherlnds nd led to mjor shedding of full-time jobs nd signified the strt of the trend towrds incresed lbour mrket flexibility fter the second oil crisis. Similr tendencies cn be observed for flexible employment in tht period. So the recession set in plce the trend processes towrds incresed frctionlistion of employment tht continued fter the economy hd resumed growth. Figure 13 Growth in employment less thn 1 hours per week nd GDP growth, Netherlnds, Per cent per nnum Rel GDP growth Growth employment less thn 1 hours per week Source: CPB, Netherlnds. The period fter the first oil crisis up until the erly 199s ws chrcterised by very significnt trnsformtion of the Dutch lbour mrket towrds incresed flexibility nd frctionlistion of employment. This process led to the decline in number of hours per full-time equivlent job (see Figure 1). However, the pce of chnge slowed round 199, fter which the growth in flexible nd short-hours employment fell nd lso becme pro-cyclicl (see Figure 1). It is cler tht once the lbour mrket chieved certin level of flexibility both prt-time nd full-time jobs becme precrious during subsequent recessions (Figures 1 nd 11). This is lso consistent with the observtion in Figure tht in the 199s the upwrd trend of short-hour jobs reversed with more prt-time jobs offering more thn 1 hours per week being creted reltive to those offering less thn 1 hours per week.. Conclusion This pper is precursor to more detiled study of the djustment processes tht firms use to del with mjor fluctutions in sles. The underlying im of this reserch is to investigte how within-firm djustments led to underemployment which, in turn, becomes disciplinry force on the infltion generting process. In this pper we hve considered simple model of within-firm djustments tht helps us understnd how firms djust the different components of employment (full- nd prt- 1

17 time; temporry, short-hours) to meet the flux nd uncertinty of the demnd conditions they fce. We chose the Netherlnds s test cse becuse it hs experienced some strk shifts in full-time nd prt-time employment over the lst 35 yers since the oil shocks of the 197s nd erly 19s. Unfortuntely, we only hve nnul dt vilble to us for the Netherlnds within the employment ctegories of interest. This precludes more detiled econometric study to explore the symmetries of the cyclicl djustments which is further feture of the model developed in Section. In further study using qurterly dt (for shorter period) we will demonstrte tht the model predictions regrding these symmetries re consistent with the informtion in the dt. We re lso extending this work to encompss the developments in severl OECD countries where such dt is vilble. It is cler tht while the overll trend in of full-time equivlent jobs per person hs been negtive over the period exmined (199-9), the rte of decline hs fluctuted in very cler pro-cyclicl mnner. This mens tht cyclicl downturns in the Netherlnds generted stronger decline in the number of full-time hours per person nd reinforced the declining trend. The recessions in 191, 1993 nd lso resulted in disproportionlly strong decline in full-time employment nd were times when firms shed full-time employment nd replced this cpcity with prt-time employment jobs. Those full-time jobs did not repper in the subsequent upturn. It is in this sense tht we sy tht recessions constitute mjor turning points in lbour mrket structure. In the Netherlnds, the 19-3 recession set off dynmic tht led to very significnt increses in lbour mrket flexibility tht hs persisted s permnent feture. Finlly, there is no disproportionlly strong decline in prt-time employment during the shrp recessions of 191, 1993 nd, which is consistent with the previous observtions. Overll, s fr s this pper hs gone, the model developed in Section is consistent with the dt movements nd helps us explin these processes. 17

18 References Blnchrd, O. nd Lndier, A., () The Perverse Effects of Prtil Lbour Mrket Reform: Fixed-Term Contrcts in Frnce, Economic Journl, June, 11(), F1-. Chuc, P. nd Postel-Viny, F. () Temporry Jobs, Employment Protection nd Lbor Mrket Performnce, Lbour Economics, 9(1), Doldo, J., Jnsen, M. nd Jimeno-Serrno, J., (5) Dul Employment Protection Legisltion: A Frmework for Anlysis, C.E.P.R. Discussion Ppers, 533. vn Es, F. nd vn Vuuren, D. (1) A decomposition of the growth in self employment, CPB Discussion Pper, 15, Mrch 1 Khn, L.M., (1) Employment Protection Reforms, Employment nd the Incidence of Temporry Jobs in Europe: 199-1, Lbour Economics, 17(1), Mitchell, W.F. nd Muysken, J. () Lbour underutilistion nd the Phillips Curve, Working Pper -9, Centre of Full Employment nd Equity. Mitchell, W.F. nd Muysken, J. (b) Full employment bndoned: shifting snds nd policy filures, Aldershot, Edwrd Elgr. Mortensen, D.T. nd Pissrides, C.A. (199) Job cretion nd job destruction in the theory of unemployment, Review of Economic Studies, 1(3), OECD (199) Jobs Study, Orgnistion for Economic Co-opertion nd Development, Pris. OECD () Employment Outlook, Orgnistion for Economic Co-opertion nd Development, Pris. Ohnin, L., Rffo, A. nd Rogerson, R. () Long-Term Chnges in Lbor Supply nd Txes: Evidence from OECD Countries, 195-, Journl of Monetry Economics, 55(), Stilinos, A. nd Dimitrios, T. () Ressessing the Vlidity of Verdoorn's Lw Under Conditions of Sptil Dependence: A Cse Study of the Greek Regions, Journl of Post Keynesin Economics, 9(1), Wsmer, E. (1999) Competition for Jobs in Growing Economy nd the Emergence of Dulism, Economic Journl, 19(57),

19 Appendix Let x = g(h)/h = α[1 h/(h mx )]. Then eqution (9b) cn be rewritten s: α α x 1 W + α W x 1 W α = x 1 W x [1 + W x ] 1 x α = hence [x W] [1 W x ] = or This cn be written s qudrtic function in x: α x x W = which yields s solution: x = α [ α w] This solution shows tht x is decresing in, nd hence h is incresing in. Hence, in n expnsion, chrcterised by > 1, employers will employ more hours in temporry job thn in recession. Moreover, since x is incresing in W, h is decresing. 1 The uthors re Professor of Economics nd Director of Centre of Full Employment nd Equity t the University of Newcstle, Austrli (Mitchell) nd Professor of Economics nd Director of CofFEE- Europe, t the University of Mstricht, The Netherlnds (Muysken). The solution x = α [1 1 + w leds to negtive vlue of x, which is impossible by definition. α 19