Flexnet ConferenceLeuven, 28-29 October 2011

Stefano SacchiUniversity of Milan and Collegio Carlo Alberto, Turin

stefano.sacchi@unimi.it

Flexibility and Worker Security in Advanced Political Economies

Out in Spring 2012

Policy Press(in the US,

University of Chicago Press)

• Studying the empirical links between labor market flexibility and worker security (dynamically: labor market flexibilization and its consequences on worker security)

• Most studies focus on the macro level: policy reforms and arrangements

• Individual-level studies tend to focus either on the labor market (careers, wages) or on the social protection system (benefits received) but less so on the interaction between the two

• But such interaction is key if worker security is understood as employment and income (i.e., wage and social) security

motivation

• In-depth analysis of Italy, to single out and document the processes and mechanisms empirically linking flexibility and security in an advanced political economy.

• Show that these processes and mechanisms are relevant, in various degrees, in Germany, Japan and Spain

• All social-insurance countries that have undergone important changes in their labour markets in the past decades, witnessing substantial deregulation at the margin and the spread of non-standard work

Labour market reforms

• All the four countries analyzed have introduced labour market reforms at the margin as a strategy of response to high unemployment rates (or perceived high unemployment rates, as in Japan), and to accommodate productive necessities that could no longer be satisfied with existing instruments. In doing so, they sought to shelter the core workforce from regulatory changes, shifting the burden of functional adjustment mostly on new entrants in the labour market.

• Spain: Liberalization of the use of fixed-term contracts in Spain already in the 1980s; incidence of fixed-term in dependent employment rose from less than ten per cent in the early eighties to more than a third ten years later, it still makes up a quarter of dependent employment.

• Germany: comprehensive reform of both the labour market and the social protection system (the Hartz reforms, entered into force between 2003 and 2005), introducing new forms of employment and restructuring its existing income maintenance system for the active population.

• Japan: the traditional model of work relationships based on long-term mutual commitment between workers and firms (shushin koyo) and a significant role of company-based welfare provision are being increasingly and radically challenged by the diffusion of more flexible work arrangements. More than formal deregulation of non-standard contracts – that has however taken place – massive substantive changes are occurring.

Reforms at the margin• Spain, which already in the 1980s had

gone the furthest in the strategy of reform at the margin has later tried to redress it, acting on both sides of re-regulation of fixed-term work and deregulation of open-ended work, apparently to little avail thus far (but the effects of the 2010 reform have obviously still to percolate through the labour market). Italy and Germany have maintained regulation of open-ended contracts largely intact, while Japan has written into law the principles of protection against unjustified dismissal.

• labor market flexibility is a multidimensional concept

• we focus on numerical flexibility: easing EPL for open ended workers; making it easier for firms to hire fixed-term workers

labor market flexibility

Share of fixed-term dependent employment on total dependent employment, 1980-2009

Source: OECD data.

Share of part-time dependent employment on total dependent employment, 1980-2009

Source: OECD data (for Japan: National Statistical Office)

• Focus on stabilization of material life chances

• Worker security: capability of an individual to mantain an adequate living standard through labor market participation and/or (public or mandatory private) social protection when not in work

• Worker security is given by a combination of employment security, wage security and social security

worker security

substitutability between security dimensions

Even if they should take place, interrupted (‘bumpy’) careers do not lead to insecurity per se, provided that when in employment workers earn wages high enough to allow for precautionary savings and income smoothing; or if income-maintenance schemes during periods of no employment or top-up benefits for low incomes allow for the enjoyment of an adequate standard of living

• Worker security (or, on the contrary, precariousness) does not depend solely on a country’s labour market institutions, or its employment protection legislation; it emerges as the outcome of the interaction between labour market dynamics and the social protection system.

• The relationship between the main strategy of labour flexibility adopted in many advanced countries in the past twenty years – reducing regulatory constraints to the use of non standard, mainly fixed-term work – and worker security cannot be solved at the analytical level: empirical research on the consequences of flexibility in terms of work careers, wages and social protection must be carried out.

Contribution

What we do:•separately investigate the relationship between non-standard work arrangements and the three main dimensions of worker security (operationalized through employment continuity, wages, and access to social protection);•propose, based on a unifying monetary metric, a summary measure which is comprehensive in the medium run of the three elements above, allowing for international comparisons;•overall, highlight the mechanisms linking institutional dualism(s) at the policy output level to divides at the outcome level.

What we do not do:•provide an evaluation of labor market reforms (we do not assess counterfactuals)•estimate behavioral responses to labor market policies.

Contribution

Data

• For Italy, most work carried out on administrative microdata: individual work histories (WHIP)

• For Germany, Spain and Japan mostly secondary evidence. Problem: a good deal of heterogeneity is lost as most literature groups fixed-term workers together as “temporary”: direct hire temps, TAW, apprentices, sometimes independent contracts, etc.

• The latter tends to hide very big differences: Italy’s detailed analysis shows that heterogeneity is fundamental

employment security• employment security: reasonable expectation

of having secure and continuous employment careers, which may entail changing employers and jobs

• Employment continuity is a matter of:

• duration of the contracts

• frequency of job-to-job transitions

• duration of non-employment

• frequency of transitions towards contracts with longer duration

Italy1. fixed-term contracts have shorter durations than open-

ended ones (but open-ended contracts are far from being ’permanent’)

2. fixed-term workers are roughly as likely as standard workers to enter non-employment when the job spell ends

3. fixed-term workers experience on average non-employment spells of shorter duration

4. (2) and (3) are not sufficient to compensate for (1)

5. Moreover, fixed-term workers are more likely to get other fixed-term contracts (than open-ended contracts)

⇒ fixed-term jobs are associated to lower employment security

Port of entry: Other things being equal, holding a job – under whatever arrangement – enhances the probability to work also in the future, but

Persistence: The most likely outcome is that of persisting in the same type of contract.

Only within-firm effects: These effects disappear once within-firm transitions are controlled for, so that the likelihood of fixed-term workers getting a job in a different firm after their contract has expired is not significantly different from that of the unemployed. The only real port of entry to open-ended jobs across firms lies in open-ended contracts themselves.

Germany

• Non-standard work mainly concerns low qualified individuals, and those who fail the transition from training to work, plus those with university education. With the exception of the latter, this group might therefore be at high risk of employment discontinuity.

• For workers who do not enter or fail the vocational training path to stable employment, fixed-term jobs, despite the initial high turnover, represent an alternative to gain employment continuity in the medium run.

• Agency workers represent nonetheless a notable exception to this positive picture (in contrast to Italy)

Japan

• Substantial turnover; non-standard workers’ probability to become unemployed is five times as high as for standard ones

• Entering regular employment for non-standard workers is extremely unlikely: in the short run the probability to get a standard job is lower for non-standard workers than for the unemployed

• It takes twenty years of participation to the labor market for the probability of holding a standard job to be the same for everybody irrespective of their starting position

• Japanese firms’ recruitment strategies for core positions basically did not change in the last decades: only 25% of Japanese firms consider promotion from non-standard to standard positions a viable recruitment strategy. Past work experience thus deeply determines one’s career perspectives and its impact cumulates over time

Spain

• Very similar to Italy

• High turnover

• Partly compensated by lower unemployment spells (this also crowds out “incumbent” long-term unemployed, systematically anticipated by workers moving back and forth from unemployment to temporary jobs in their job search activity)

• A small fraction only of temporary positions is eventually converted into open-ended employment relationships and this happens either in the presence of strictly binding legal constraints or when temporary workers present a credible threat of quitting their current job

Gross wage differentials in Italy(benchmark: open ended full time)

Wage increase for independent contractors to match standard workers’

overall economic treatment

Germany

• Not controlling for individual unobserved heterogeneity would put the wage gap up to 25-28%

• Controlling for unobserved heterogeneity the wage gap shrinks to 4-6%.

• Temporary agency workers appear to suffer from a more substantial gap of 15-18% after controlling for observed and unobserved characteristics

• Part-time no penalty

Japan

• part-time is explicitly related to status within the firm and not to hours worked: Japanese surveys indicate that 20-30% of those classified by their employers as part-time work as many hours as full-time workers

• hourly wage differentials can be as high as about 40%, with up to 60% of this gap not explained by differences in productivity

• part-time workers are not covered by the traditional seniority-based pay and promotion system (Nenko joretsu), whereby employees’ wages are closely tied to their age and seniority

Spain

• Wage gape of about 10% for temporary workers

• 10-15% for men; 7% for women

• Gap reduces with firm seniority, but this is generally short

• Part-time no penalty

Social security

• For Italy detailed analysis of actual eligibility (assessed through individual work histories) to UB, but also maternity and sickness schemes (plus pensions)

• Comparative: unemployment compensation and income-maintenance system for working-age population not in work

Income-maintenance system for working age population not

in work

Unemployment insurance

Unemployment assistance or social assistance for able to work

General social assistance

Germany X X X

Spain X X (x)

Italy X - -

Japan X - -

Entitlement, eligibility, coverage

• Entitlement is used to connote formal availability of an actionable right to benefit provision for a given category of workers, that may then be conditional to further specific requirements. Its extension thus comprises those who – in principle – have the formal opportunity to receive a benefit.

• Eligibility connotes the substantive ability to claim a benefit on the grounds of qualifying conditions. Its extension thus comprises those who, among those entitled, actually fulfil the requirements set for accessing the right to benefit, for instance on the basis of a claimant’s work and contribution record for social insurance, of need as operationally assessed through a means-test for social assistance.

• Coverage connotes actual benefit recipiency among a target population.

Entitlement to unemployment insurance

• Italy: self employed and independent contractors not entitled

• Germany: self-employed not entitled; marginal employment (minijobs) not entitled; also very short-termed seasonal workers not entitled

• Spain: all workers now formally entitled: compulsory for dependent workers and independent contractors whose income mainly come from a single employer; enrolment on a voluntary basis for self-employed

Entitlement to unemployment insurance -

Japan• Self-employed not entitled

• Non-standard employees not always entitled to unemployment insurance – or to other social programmes.

• Those who work less than 20 hours per week and fixed-term workers whose contract is shorter – or are scheduled to work less – than six months cannot be enrolled in the unemployment insurance scheme.

• 30% of temporary agency workers, 55% of part-time workers and 70% of fixed-term workers not formally entitled to unemployment insurance (as a consequence of lack of enrolment)

OUB RUB

entitlementonly dependent workers, no apprentices, no independent

contractors (formally independent)

only dependent workers, apprentices only if previous

qualifying job spell, no independent contractors (formally independent)

eligibilityinsured since at least 2 yearscontributory requirement: at

least 52 full weekly contributions in the 2 years

before unemployment

insured since at least 2 yearswork requirement: at least 78 worked (or work-equivalent)

days in the year the benefit is claimed for

duration 8 months, 12 months for over 50

number of worked days in the reference year, with a

maximum of 180

amount

60% of previous wage up to 6 months; 40% for the following

2 months; 30% for further months

ceilings: 890 €/month gross for gross monthly wage up to 1,930 €; 1,070 €/month gross

beyond

35% of previous wage up to 120 days; 40% afterwards

NO UB OUB RUB

full time open ended (standard) 9,1% 86,8% 4,1%

part time open ended 19,4% 69,7% 11,0%

apprentices 78,9% 1,3% 19,8%

direct hire temps 38,1% 42,8% 19,1%

part time direct hire temps 47,1% 29,5% 23,4%

temp agency workers 47,8% 33,9% 18,3%

part time temp agency workers 63,4% 17,3% 19,3%

independent contractors

100% 0% 0%

total 17,1% 75,9% 7,0%

EMPLOYMENT STOCK

NO UBSTOCK OF

EXCLUDED FROM UB

open ended(private sector

only)11,302 10,5% 1,187

direct hire temps 1,968 38,1% 750

apprentices 260 78,9% 205

trainees 140 50,0% 70

temp agency workers

116 47,8% 55

public sector independent contractors

560 100% 560

private sector independent contractors

375 100% 375

total 14,721 - 3,202

Unemployment insurance

• Japan: many workers not entitled, maximum duration rather short

• Italy vs Germany: ALG I provides similar coverage to OUB+RUB, but generosity and duration different (already comparing ALG I to OUB, cristal-clear when including RUB)

• Spain: possibility of long duration, comparatively easy access due to long reference period for eligibility

Spanish unemployment assistance fragmented, mainly geared to those with family responsibilities and to elderly workers, thus disregarding young non-standard workers

Comprehensive monetary measure of what one gets from participation to the labor market and work-related social protection in in the medium runthe medium run (six years)

it includes The wage earned, net of the contributions paid to the social

security administration and of taxes

The social protection benefits received, excluding pensions

we define insecure those workers whose total net income is less than 60% of the median of its distribution on the whole population

2008 prices were used

A monetary measure of worker (in)security

(Italy)

Conclusions (Italy)

• Non-standard workers are worse off, as compared to standard workers, with respect to all the relevant dimensions of worker security: they have lower employment security, lower wage security, lower social security.

• All in all, they have lower cumulated labor and social protection incomes over the medium run, associated with lower upward income mobility. This remains true even after controlling for individual unobserved characteristics.

Comparative conclusions

• Italy and Spain seem to be comparable as regards employment security, with Japan faring worse (segregation) and Germany being a case where fixed-term work (much less so TAW) is port of entry

• Wages: huge differences in Italy, problems with unrecognized contract heterogeneity in other countries, Germany substantial gaps for TAWs, Spain about 10% overall, Japan huge gaps are possible

• Social protection: substantial entitlement gaps in Japan; in all countries, social insurance doesn’t work any longer

Summing up

• analysis casting light on the mechanisms linking the output of labor market deregulation (dualisms) to outcomes (divides: patterns of disadvantages in the labor market)

• it does so focusing on the interaction between labor market dynamics and the functioning of social protection systems (thus looking at labor market dualisms only captures part of the story, if we want to link them to outcomes: how patterns of disadvantage in the labor market are replicated, transformed or offset by the social protection system is key)

• non-institution-specific (‘able to travel’) monetary measure of worker security to analyze labor market divides (outcomes), comprising employment and income (wage and social) security

Policy proposals

• Single contract neither necessary nor sufficient

• Basket of rights (employment, wage, social) for all workers, irrespective of their contract, complemented with social insurance/social drawing rights

• Return to job security neither necessary nor advisable: TLMs, Supiot report