Chasing the carrot. Effort provision of fixed-term employees

Transcription

1 Chasing the carrot Effort provision of fixed-term employees Mario Bossler * Philipp Grunau October 2016 Abstract Fixed-term contracts can serve as a screening device to reveal the true ability of workers. To achieve promotion to a permanent position, fixed-term employees have an incentive to prove themselves by providing higher effort than their competing coworkers. We further argue that effort provision depends on the worker s expectations of promotion prospects. Applying fixed effects estimation to the German administrative register data, we find that fixed-term employees work longer hours than those with a permanent contract. Moreover, among the group of fixed-term workers, we find an inverse U-shaped relationship between extra hours of work and the establishments previous realization of promotions. [101 words] JEL codes: J24, J41, M51 Keywords: fixed-term contracts; effort; working hours; incentives; moral hazard. * Institute for Employment Research, Department Labour Market Processes and Institutions. Corresponding author: Institute for Employment Research, Department Establishments and Employment, Regensburger Str. 104, Nuremberg, philipp.grunau@iab.de. 1

2 1. Introduction Employers can apply fixed-term contracts for various reasons. Apart from the prominent flexibility argument, implying that the application of fixed-term contracts provides firms with the opportunity to adjust the workforce more easily to changes in economic demand, fixed-term contracts serve as a screening device to reveal the true ability of workers more thoroughly than in a probationary period (e.g. Boockmann & Hagen, 2008). From the workers perspective, fixed-term contracts are a chance for career mobility if they serve as stepping stones into permanent employment (Korpi & Levin 2001). However, regular workers may always favour permanent contracts over fixed-term contracts as the former come along with higher job protection and a long-run career perspective. Either way, fixed-term contracts induce an incentive for temporary workers to prove themselves by providing higher effort than their competing co-workers in order to achieve promotion to a permanent position. According to these individual incentives, we expect fixed-term employees to work longer hours than employees with a permanent contract. Moreover, we argue that effort provision should depend on the individual expectations of promotion prospects. Therefore, we expect the establishments policy of providing permanent contracts to their fixed-term employees to affect effort provision: The effort level in fixed-term employment should be lowest in establishments with low or high prospects of promotion into permanent employment and highest in establishments with a mid-level share of fixed-term workers who receive a permanent contract. To put it differently, there is no reason for rational fixed-term employees to work longer hours when there is either no prospect for obtaining a permanent contract or when every fixed-term contract gets promoted into a permanent position. Hence, we expect a reverse U-shaped relationship between the observed prospects of promotion and effort provision. We employ large-scale longitudinal German register data on employment subject to social security contributions from 2012 to This dataset allows identifying fixedterm contracts and following employees over time and across establishments. This enables us to control for both employee-specific and employer-specific time-constant unobserved heterogeneity. To our best knowledge, this is the first study to address the issue of effort provision of fixed-term workers by means of actual working hours. Beyond that, we are the first to account for both employee and employer heterogeneity, hence being able to control both for sorting into temporary employment and for (time-constant) differences between establishments. 2

3 2. Literature review There is a large and growing body of analyses of fixed-term contracts. The basic assumption underlying both our paper and many preceding related studies is that individuals actually favour permanent employment over fixed-term contracts. In this regard, most theoretical models suggest better employment conditions for permanent employees. For instance, by means of their insider-outsider approach, Lindbeck and Snower (1988) argue that differences in employment protection and turnover costs lead to higher wages for insiders, which may even be stronger when a union is present (Bentolila & Dolado, 1994). Nevertheless, firms should still be able to attract high ability workers for fixed-term contracts because of sorting (Loh, 1994). Since employers usually apply fixed-term contracts for the periphery of the workforce, i.e. the outsiders, according to these theoretical considerations they should suffer disadvantages. However, following the theory of compensating wage differentials, fixedterm contracts may entail a wage premium to compensate for non-monetary disadvantages, e.g. with respect to employment protection. In that case, temporary workers would not necessarily prefer permanent employment. In fact, it has been shown that temporary employment involves non-monetary disadvantages in terms of less training participation, lower levels of job satisfaction (Booth et al., 2002), and higher levels of reported job insecurity (Campbell et al., 2007). However, there does not seem to be a compensation via a wage premium. On the contrary, a plethora of studies agrees that temporary employment is accompanied by a wage penalty (e.g. Booth et al., 2002; Mertens & McGinnity, 2004; Gustaffson et al., 2001), hence implying that fixed-term employment in fact appears to be less desirable than a permanent contract. However, to date only a few notable exceptions address the consequences of temporary employment for effort provision. As one of these exceptions, Engellandt and Riphahn (2005) investigate this issue by means of Swiss data and by operationalising employee effort through unpaid overtime and absences. They find a higher likelihood of working unpaid overtime hours when workers are in temporary contracts, but no difference in absenteeism. Relying on data from Australia and operationalizing effort provision with sickness absence, Bradley et al. (2014) find that temporary employees show higher levels of absence upon moving to a permanent contract. Moreover, Jimeno and Toharia Cortés (1996) provide evidence for Spain showing that temporary employees provide higher levels of effort than those with a permanent contract. Similar to this, and exploiting institutional regulations, Ichino and Riphahn (2004) show with data of a large Italian bank that once employment protection sets in after a 3

4 probationary period, employees are more absent from work. Similar findings are obtained for Germany, by Riphahn and Thalmaier (2001) as well as Riphahn (2004). Fixed-term contracts have also been addressed with regard to their impact on firmlevel productivity, hence implicitly assuming the link via employee effort. Dolado and Stucchi (2008) conclude that high levels of temporary employment reduce total factor productivity, whereas high conversion rates into permanent employment are associated with an increase in firm-level productivity. 3. Data We draw our analyses on the German administrative employment register ( Beschäftigtenstatistik ), which is a data product based on the mandatory reports of each employees liable to social security contributions. As we are interested in comparing temporary with permanent workers within establishments, our analysis sample is defined as follows: We draw a 50-percent sample of all establishments with at least one fixed-term worker and subsequently select the full population of workers of these establishments between 2012 and By means of this dataset, we are able to compare individuals within establishments by controlling for employer and employee fixed effects. Moreover, we are able to derive establishment-level policies regarding promotions into permanent employment. We measure effort provision by means of the actual working hours per week, which is part of the register data since its recent revision in As we use establishment fixed-effects throughout our analyses, we adjust for the regular (contracted) working time and hence interpret our measure as over-time work. However, the use of working hours to proxy effort is often criticised because of potential situations in which workers either use longer working hours to signal effort (Anger, 2008) without a corresponding surplus in productivity or when they are even less productive than their coworkers requiring them to work longer hours. However, there is empirical evidence showing that longer working hours are indeed associated with higher productivity (Bell & Freeman, 2001; Pencavel, 2015). Even if longer hours are not directly associated with higher productivity, they can still signal willingness to work extra hours, hence potentially constituting a strategic signal to seek promotion to permanent employment (Bossler & Grunau 2016). 4

5 4. Empirical strategy We are particularly interested in two aspects of the effect of fixed-term contracts on actual working hours: First, we analyse whether temporary workers indeed work longer hours than their permanently employed co-workers and to which extent this potential differential is reduced upon transition into permanent employment, i.e. when a fixed-term contract is converted to be permanent. Second, we address whether effort provision depends on workers expectations about individual prospects for promotion into permanent employment. We operationalise the perceived prospects for promotion through the establishment s previous practice regarding suchlike promotions using the share of promoted fixed-term employees. As we want to compare similar workers within establishments, we run regressions using cell fixed effects ψ c(i,j) for worker-establishment combinations in an equation explaining actual working hours: hrs it = FTC it δ + ψ c(i,j) + x it β + γ t + ε it (1) Thus, the coefficient of fixed-term contracts δ should represent the impact of temporary employment on actual working hours among similar workers within the same establishment. When we analyse how the establishments promotion policy affects the fixed-term employees effort, we explain actual working hours of temporary workers by the share of promoted fixed-term workers at that workplace in the previous year: hrs it = share promoted j,t 1 δ 1 + (share promoted j,t 1 ) 2 δ 2 + ψ c(i,j) + x it β + γ t + ε it (2) 5. Results From a theoretical point of view, a wage premium may compensate for the non-monetary disadvantages accompanying fixed-term contracts. However, the remainder of our analyses implicitly relies on the assumption that fixed-term contracts are less desirable than permanent contracts, providing temporary workers with an incentive to move to permanent employment. Therefore, we start our multivariate analyses by aiming to confirm the empirically established fact that temporary employment involves a wage penalty. Exploiting the variation both within establishments and within employees, we detect a wage penalty for (full-time) fixed-term contracts of 14.3 per cent (Panel A of Table 1 5

6 below). This sizeable wage penalty seems to be larger for women (15.9 per cent) than for men (13.3 per cent) (Panels B & C). This finding is in line the with wage differentials presented by Booth et al. (2002). Table 1: Coefficients from regressing daily wages on fixed-term contracts; fixed-effects panel estimation Dependent variable: Daily gross wage (log) Panel A All employees Panel B Men Panel C Women Coeff. SE Coeff. SE Coeff. SE Fixed-term contract (FTC) -.143*** *** ***.001 Observations 13,973,889 9,215,709 4,758,180 Cells (Establishments/workers) 7,367,353 4,757,377 2,609,977 Adjusted R-squared Data source: German employment register, analysis sample. Notes: Asterisks indicate significance levels: *** p<0.01, ** p<0.05, * p<0.1. As permanent employees earn more than temporary workers, we can assume that employees desire a permanent contract not only for reasons of job protection, but also because of a substantial wage premium. Turning to Table 2, we show that there indeed is a discrepancy in actual working hours between temporary and permanent employees, with those working on a fixedterm contract on average working an additional 17 minutes per week. When we run separate regressions by gender and by working contract (full-time versus part-time) the results corroborate what is suggested by theory: Men seem to be more responsive to fixed-term employment in terms of actual working hours than women (Table 3, Panels A & B). The same is true for those with a full-time contract, who tend to have a larger scope to increase working hours when being temporary employed compared with otherwise similar part-time employees (Table 3, Panels C & D). 6

7 Table 2: Coefficients from regressing actual working hours on fixed-term contracts; fixed-effects panel estimation Dependent variable: Actual working hours per week Coeff. SE Fixed-term contract (FTC).284***.011 Observations 18,954,244 Cells (Establishments/workers) 10,537,364 Adjusted R-squared.89 Data source: German employment register, analysis sample. Notes: Asterisks indicate significance levels: *** p<0.01, ** p<0.05, * p<0.1. Table 3: Coefficients from regressing actual working hours on fixed-term contracts; fixed-effects panel estimation; by working contract (Panels A and B) and gender (Panels C and D) Dependent variable: Panel A: Women Panel B: Men Actual working hours per week Coeff. SE Coeff. SE Fixed-term contract (FTC).094*** ***.019 Observations 4,010,130 8,164,499 Cells (Person/Establ.) 2,237,739 4,262,370 Adjusted R-squared Dependent variable: Panel C: Full-time Panel D: Part-time Actual working hours per week Coeff. SE Coeff. SE Fixed-term contract (FTC).174*** ***.019 Observations 12,174,629 6,779,615 Cells (Person/Establ.) 6,500,108 4,178,486 Adjusted R-squared Data source: German employment register, analysis sample. Notes: The samples in Panels A and B are restricted to employees holding a full-time contract. Asterisks indicate significance levels: *** p<0.01, ** p<0.05, * p<0.1. 7

8 Finally, we address our second hypothesis of an effect of the firms promotion strategy with respect to permanent positions. We expect only a small effect on effort provision at establishments with low or high shares of such transformations of fixed-term contracts into permanent employment in the previous year. Our estimates in Table 4 confirm this hypothesis: a diminishing marginal effect from the establishment-level share of promoted fixed-term contracts on actual working hours. The corresponding inverse U-shape reaches its peak in effort provision at a share of promotions of around.35. This corroborates the hypotheses that for employers, it is optimal to refrain from promoting either nobody or (almost) everybody of the workforce under fixed term-contracts but to provide a reward setting promoting only a third of fixed-term contracts each year in order to incentivize temporary employees best. Table 4: Coefficients from regressing actual working hours on the share of promotions to permanent contracts; fixed-effects panel estimation Dependent variable: Actual working hours per week Coeff. SE Share of FTCs promoted to.268**.135 permanent employment Share squared -.349**.170 Observations 2,311,983 Cells (Establishments) 210,908 Adjusted R-squared.50 Source: German employment register, analysis sample. Note: Asterisks indicate significance levels: *** p<0.01, ** p<0.05, * p< Conclusions In the course of this paper, we address the effort provision of fixed-term workers, hence shedding light on the consequences of temporary employment. We are the first to operationalise effort with actual working hours and to employ large-scale administrative data to control for both employer and employee-specific unobserved heterogeneity. First, in order to establish the fact that temporary work is less desirable than permanent employment, we confirm the results of related studies that detect a wage penalty associated with fixed-term contracts. This is crucial as the remainder of our analyses 8

9 relies on the assumption that rational fixed-term workers seek permanent employment. In the main analysis, fixed effect regressions reveal that temporary employees work longer hours than those holding a permanent contract. This differential is larger for men and full-time jobs than for women and part-time employment. Moreover, we provide evidence for the importance of workers expectations about their individual promotion prospect. The relationship between actual working hours and the share of fixed-term workers of the establishment that are received a permanent contract in the previous year appears to take a reverse-u shape. Accordingly, the positive impact of fixed-term contracts on effort provision is lowest for low and high shares of promotion and highest between the two extremes. Our results provide important implication for establishments: First, employers can increase effort by applying fixed-term contracts. Second, effort provision of fixed-term workers hinges on the internal policy regarding the promotion of temporary to permanent contracts. Employers have a rational incentive to adjust their promotion policy accordingly in order to maximise the incentive for higher effort provision. 9

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