Not All Firms Respond Equally to Protections for Temporary Workers

This blog is based on an article in the Journal of Social Policy by Hyejin Ko and Andrew Weaver. Click here to access the article.

One persistent challenge that many advanced economies face concerns job quality. Over the past few decades many countries have attempted to spur job creation by allowing or promoting the growth of flexible, non-standard work arrangements. Countries ranging from Germany to Japan allowed employers to make greater use of temporary and part-time employment arrangements.

However, these developments come with a cost: the erosion of job quality. In Korea, legal changes following the Asian financial crisis led to a situation in which the percentage of non-regular workers grew from 17% to 29% of the workforce from 2001 to 2006. A number of countries responded by enacting a second set of reforms that attempted to limit the use of temporary workers and the growth of non-standard employment. In 2007, Korea implemented legislation that restricted the maximum length of fixed-term labour contracts and prohibited discrimination against non-regular workers in wages and various fringe benefits. 

The typical social science approach to evaluating such employment protection legislation (EPL) has been to investigate what impact the changes have on total employment, as well as the relative number of permanent and temporary jobs. Such research is very valuable. At the same time, the results of this approach are necessarily based on averaging the responses of many different types of employers.

In our research, we take a somewhat different tack. We are interested in identifying which employers comply with the spirit of the legislation – that is, converting non-regular workers to permanent status and thus improving job quality – and which employers resist. We believe that identifying which characteristics are associated with compliance and resistance will enable more precise predictions of success and failure for given reforms, as well as improved policy designs for a given economic and institutional context. 

We are also interested in adding to the literature on how a country’s institutional structure and industrial relations systems interact with employment reforms. Some scholars have argued that firms and industry sectors that bear greater economic risks regarding employee performance will seek to socialize these risks and will thus support EPL. Over the past few years researchers have also debated whether unions, when faced with calls to extend good working conditions to non-traditional workers (such as temporary employees), will act in an inclusive manner or will seek to protect insiders at the expense of less fortunate workers.

So what do we find? Using a difference-in-difference framework applied to the Korean Workplace Panel Survey, we attempt to uncover the causal impact of the 2007 legislation. As might be expected, more profitable business establishments were more likely to convert non-regular workers to regular status.

However, greater resources do not automatically imply compliance with EPL. Employers that paid above-average wages were less likely to convert. By contrast, establishments that shifted productivity risk onto employees – through the use of performance pay – were significantly more likely to convert. These results imply that compliance will be lower among both employers with the most desirable job quality and employers with tight financial margins. At least with regard to this labour-market phenomenon, we do not see greater willingness of risk-bearing employers to support social welfare reforms. 

We also find several intriguing results relating to the institutional characteristics of the Korean economy. Despite the prominence of large “chaebol” conglomerates in Korea, we did not find that either establishment size or being part of a multi-site firm predicted differential compliance.

Unions, however, turned out to play a more interesting role. The main effect of being unionized was insignificant. However, this result hides underlying heterogeneous effects. Small unionized establishments with limited occupational diversity were significantly less likely to convert non-regular workers to permanent status, thus implying behaviour consistent with the protection of insiders.

In large employers with greater occupational diversity, unions were associated with the opposite effect. The degree to which unions embrace broader social goals affecting non-members would thus appear to vary with context. Diversity of membership and the resources associated with larger size may create the conditions under which unions exert pressure based on the social identity of workers broadly rather than the narrow self interest of incumbent employees. 

Ultimately, resources, risk-shifting, job quality, and union structure all appear to be important factors influencing whether a given employer will comply with or resist labour-market reforms protecting non-regular workers. We hope these findings provide both useful evidence to policymakers as well as a springboard for more detailed research into the impact of labour-market policies.  

About the authors

Hyejin Ko is Associate Research Fellow at the Korea Institute for Health and Social Affairs.

Andrew Weaver is Assistant Professor at the University of Illinois at Urbana-Champaign.


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