Academic journal article Seoul Journal of Economics

The Impact of Demand Shock on the Employment of Temporary Agency Workers: Evidence from Japan during the Global Financial Crisis

Academic journal article Seoul Journal of Economics

The Impact of Demand Shock on the Employment of Temporary Agency Workers: Evidence from Japan during the Global Financial Crisis

Article excerpt

I. Introduction

Labor market reforms, including the reduction of dismissal costs, promotion of part-time contracts, and loosening of regulations on temporary agency work, have led to the prevalence of flexible labor contracts in developed economies, particularly in Europe and Japan. With reference to this widespread use of flexible labor contracts, considerable research has examined the effects of different dismissal costs on labor demand between permanent (or primary) and temporary (or secondary) workers. Numerous theoretical and empirical studies suggest that lowering dismissal costs for temporary workers results in more volatile labor demand, although it also temporarily increases total labor demand (Saint-Paul 1991; Bentolila, and Saint-Paul 1995; Boeri, and Garibaldi 2007; Boeri 2011; Sala, Silva, and Toledo 2012; Costain, Jimeno, and Thomas 2010). From a theoretical perspective, labor demand becomes volatile because temporary workers are used by firms at the margin as a means for adapting to demand fluctuations. However, the number of empirical evidence confirming that firms actually use temporary workers to adjust employment levels in response to demand fluctuations is insufficient. This issue is relevant even if firms initially employ temporary workers as a buffer to demand shocks. For example, once hit by negative demand shocks, firms may continuously utilize their temporary workers who have accumulated some firm-specific skills. Instead of terminating the contracts (with an agency) of their temporary agency workers and once again singing new contracts with others after the recovery of demand, firms can continuously utilize these employees to save on labor cost. The present study aims to fill the above mentioned gap in the empirical literature and examine how demand shocks affect the demand for temporary workers.

To address the matter at hand, empirical researchers should clearly identify the demand shocks. However, this undertaking is generally not as easy as it seems because while demand shocks may affect the share of temporary workers, such share may affect the productivity and output of firms. The latter is likely to occur if temporary workers are less trained. In both cases, the procyclicality of temporary workers is observed. In this study, the problem in identifying demand shocks is resolved by using the global financial crisis of 2007-2009 as a natural experiment, in which the precipitous drop in global demand represents the exogenous demand shock for Japanese exporters. The global financial crisis led to a severe global recession and rapid appreciation of the Japanese yen, outcomes which substantially decreased the demand for Japanese exports (Harada et al., 2011; Hosono, Takizawa, and Tsuru 2013). Total real exports were reduced by 14.0% and 25.3% in the fourth quarter of 2008 from the previous quarter and in the first quarter of 2009 respectively. These downturns were significantly larger than those in the total exports of member countries of the Organisation for Economic Co-operation and Development (6.7% and 8.2% respectively in the two quarters). These export declines are used in the current study as a demand shock for Japanese exporters to examine the subsequent changes realized by these exporters regarding their share of temporary agency workers.

In Japan, non-regular workers (i.e., workers other than permanent full-time workers) can be classified into numerous types. Firms often directly hire temporary (i.e., workers hired based on a fixed-term contract) and part-time workers. By contrast, some firms depend on an agency and utilize temporary agency workers. These employees are hired by an agency and work for a firm based on a fixed-term contract existing between such agency and firm. This study focuses on temporary agency workers among the various types of non-regular workers because dismissing this group is considerably easier than dismissing other types of non-regular workers (e. …

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