Employment and labour hoarding: a production function approach.
| Autor | Vella, Melchior |
Introduction
As the world economy is slowly recovering the deep and widespread recession since the 1930s, a policy challenge in many developed countries is the deteriorated labour market outcomes. Job shedding became widespread and unemployment increased at record levels in most developed countries. The financial turmoil and the economic crisis have had repercussions on the growth prospects, and without in-built economic resilience mechanisms, resulting from internal flexibility and good economic governance, countries were unable to recover quickly from or adjust instantaneously to the adverse exogenous shock. Indeed, as observed in many studies, unemployment increases have been contained in countries with comparatively strong internal flexibility (Eichhorst et al., 2010; Carballo-Cruz, 2011; Eichhorst, 2014; Muffels et al., 2014).
Sharp drops in output instigate firms to reduce labour costs by shedding workers, reducing hours worked, or reducing compensation per employee. Firms tend to hoard labour, meaning that workers are retained more than is required to produce the demanded level of output. This is based on the expectations that demand will recover and soon the excess number of workers will be needed again. Furthermore, it may also be advantageous for firms, as they do not incur redundancy payments.
Though adjustment costs of firms, such as hiring-and-firing and training costs, are considered to be crucial in determining the responsiveness of firms to external shocks (Hamermesh, 1993; Hamermesh and Pfann, 1996), they are not abundant and reported in literature. Empirical literature confirms that firms do not adjust employment instantaneously in response to an aggregate demand shock, as they should under convex cost situation. By contrast, the response is often lagging, staggering and discontinuous, with periods of inertia and large adjustments to large shocks (Hamermesh, 1989; Caballero et al., 1997; Varejao and Portugal, 2007; Ejarque and Portugal, 2007).
A common approach to address this problem is to extrapolate labour demand dynamics as a partial-adjustment-like path towards new equilibrium, meaning that a distinction between desired and actual employment is made. Other studies describe the dynamics of labour demand as the result of the interaction between the shapes of the adjustment hazard function (Varejao and Portugal, 2007). The importance of nonlinearities and non-convex cost structures was also tested with micro-data (Hamermesh, 1993, 1996; Anderson, 1993). Consistent with this group of studies, empirical results have often reported a "lumpy" adjustment (Caballero et al.,1997).
Small states economies are a good example to test the hypothesise that negative impacts on labour demand can be muted if against the background of negative output growth firms hoard labour and consequently stabilise labour market trends[1]. It is generally acknowledged in the literature that countries with properly designed labour market institutions that promote "flexicurity" (Wilthagen and Tros, 2004; Muffels and Wilthagen, 2013) tend to perform well in both economic and social dimensions (Muffels et al.,2014). Such transformation also requires flexibility in the attitudes of the social partners (Esping-Andersen and Regini, 2000) to facilitate coordination between employers and employees at both central and industry level.
This paper will focus on the Maltese economy, a small and open economy in the European Union, which is highly dependent on external trade and investment relationships with the European bloc. The Maltese economy was not heavily impacted in the financial sector, the main reason being that Malta tends not to be highly exposed to the main factors that led to the crisis, including excessive reliance on wholesale financing and collateralised debt obligations. However, Malta have been affected by the spillover effects of the crisis, and experienced, amongst other things, drops in manufacturing orders and tourist inflows. With the aim "to maintain current employment and possibly [...] help to stimulate the creation of new jobs", the Maltese authorities embarked micro-level and tailor-made aid schemes designed to the different needs of the different firms (European Commission, 2009). Consequently, the Maltese experience is a good case study to capture the effect of hoarding tendencies on labour demand.
The study adds on to the existing literature on labour hoarding by estimating a dynamic labour demand equation for two industries -manufacturing and financial services in Malta. Malta is an interesting case because over the past decade, particularly during the 2009 economic crisis, aid was provided to companies, many in manufacturing, which because of a slump in demand were planning to shed their workforce. Therefore, labour hoarding can be at large the result of state intervention to mitigate the situation and avoid upheavals during the crisis. As a result of these policy measures, by estimating a sectoral-based labour demand equation, one could uncover the presence of labour hoarding in manufacturing and explain why it is more dominant relative to the financial industry.
This study will test the hypothesis, using a production function approach that the effect of production slowdown on labour demand was muted by amongst other things labour hoarding. To do this, the paper investigates labour demand in Malta by using quarterly data for the period 2000 to 2016.
The paper is organised as follows. Following this introduction, the paper presents a brief discussion on labour hoarding in Section 2. This is followed, in Section 3, by a description of the methodology employed to test the hypothesis just mentioned. Section 4 presents the results, while Section 5 concludes the study with some implications derived from the results.
The theory of dynamic labour demand
Labour hoarding as a response to cyclical fluctuations
There is an interesting literature debate about the relationship between economic fluctuations and employment performance. Most authors consider that the transmission of shocks on goods market to the labour market does not happen instantaneously, and indeed, some kind of time lag is observed. This means that firms allow labour input to fluctuate over the business cycle and hence suggesting that labour demand responds less than proportionately in response to a negative demand shock (Taylor, 1982; Hamermesh, 1996). However, it is also acknowledged on the theoretical side of the neoclassical theory, that with diminishing marginal returns to labour, the elasticity of employment with respect to output is expected to be higher than unity. This means that labour demand decreases more-than-proportionately when output declines, and increases more-than-proportionately when output rises. Given the assumption of diminishing marginal returns to labour, this would trigger average labour productivity to move counter-cyclically. Yet, as observed in many empirical works, labour productivity is pro-cyclical, suggesting that the output elasticity of employment is less than unity (Bernanke and Parkinson, 1991; Arpaia and Curci, 2010; Leitner and Stehrer, 2010; Hijzen and Venn, 2011; Fenger et al., 2014), which Solow (1964 cited in Biddle, 2014) described as the "perverse behaviour of productivity in the short run". In fact, labour hoarding behaviour can be associated with firms absorbing higher unit labour costs and thus decrease competitive position of the firm in the short run.
Although these two points of view would seem to be confrontational, the basic difference between them hinges on how firms optimise labour input and thus be consistent with the neoclassical theorem.
One possible reason for labour hoarding is the non-negligible fixed employment adjustment costs which abstain firms from laying off workers when faced with temporarily lower labour demand (Oi, 1962; Brechling, 1965; Bowers et al., 1982; Horning, 1994). For example, hiring-and-firing and training costs make it optimal for profit-maximising firms to hoard labour over short-run cyclical variations. Indeed, in such imperfect markets, such transaction costs are influential in the production function of firms (Okun, 1963).
Hysteresis in employment could also be the result of the presence of non-convex costs incurred by firms. This restricts upward and downward employment adjustment, and inaction would be the optimal response by firms to shocks. The equilibrium thus becomes path-dependent, implying that history of past adjustment periods also determine employment.
Another factor that contributes to labour hoarding results from the human capital enjoyed by employees themselves (Oi, 1962; Becker, 1970; Williamson et al., 1975). "Acquired skills that existing employees have learned on the job may make them particularly valuable to the firm, so that it pays to stockpile underemployed labour rather than run the risk of having to hire untrained men when business conditions improve".(Okun, 1963, p. 7).A possible implication is that labour hoarding is more relevant for high-skilled workers than low-skilled workers engaged in routine tasks.
In relation to the above, the nature of industrial relations and informal rules and social norms also has an a priori effect on the effectiveness of changes in the level of employment. If the relationship between the employee and the employer is relational, then the costs of layoffs can be exorbitantly high, resulting in an irreversible loss of human capital. Moreover, the firm's reputation may be destroyed which increases further the transaction cost for future recruitments (Okun, 1981). Consequently, in this regard, labour hoarding is a way of signalling to engaged and prospective workers of safeguarding a stable employment contract, and thus complements to norms of reciprocity and trust.
Finally, labour hoarding can be the product of state intervention. A possible way to cushion the negative effects during cyclical...
Para continuar leyendo
Solicita tu pruebaCOPYRIGHT GALE, Cengage Learning. All rights reserved.
