A Study of the Effect of Employment Flexibility on Firm Performance in the U.K. and Korea

Transcription

1 Preliminary - please do not quote. A Study of the Effect of Employment Flexibility on Firm Performance in the U.K. and Korea Si-Kyoon Lee Korea Employment Information Service siju0428@work.go.kr Hyo-Yong Sung Economics, Sungshin University hsung@sungshin.ac.kr Myeong-Su Yun Economics, Tulane University msyun@tulane.edu Correspondence: Myeong-Su Yun, Assistant Professor Economics, Tulane University 206 Tilton Hall, New Orleans, LA Phone: , Fax: msyun@tulane.edu. * Authors wish to thank Ira N. Gang and Jung-Woo Kim for their comments.

2 I. Introduction 2 One way to achieve labor market flexibility is to utilize various types of non-regular workers in addition to regular full time workers, for example, part-time workers, fixed term contract workers, and temporary workers hired through employment agency. 1 This practice is usually referred to as numerical or employment flexibility; on the other hand, functional flexibility encourages multi-tasking and job rotation of workers. 2 Employment flexibility has been extremely controversial. In this paper we study the effect of employment flexibility on firm performances. Those who promote the employment flexibility view it as a panacea to labor market malaises. They believe that enhancing employment flexibility can significantly lower firms' labor costs including hiring and firing costs, therefore, improving firm performances, and generating more jobs and lowering unemployment in the overall labor market. Employment flexibility is considered necessary since it allows firms to adjust the number and types of skills necessary to cope with fluctuations in demand. On the other hand, those who are against increasing employment flexibility argue that the employment flexibility is simply a labor cost saving practice at the expense of workers' job securities, replacing workers having traditional labor contracts with various types of non-regular 1 In this paper, we use "non-regular" workers to contrast to regular full-time workers. Other papers call them differently, e.g., contingency workers, temporary employment, non-standard employment among others. 2 Numerical flexibility and functional flexibility are noted as characteristics of the American model and European models, respectively (Arvanitis, 2005, 993).

3 3 workers at lower wage rates and without benefits. Some argue that increasing the use of nonregular workers may hurt the firm performance due to high turnover and low productivity of the non-regular workers (Nollen, 1996). Previous papers have not found a definitive relationship between the use of non-regular workers and firm performance. Valerde, Tregaskis and Brewster (2000) find that use of temporary workers increases firm performance measured by gross revenue as a proportion of costs. However, they do not find the same positive relationship between firm performance and other forms of employment flexibility, e.g., part-time workers, fixed-term contract workers and subcontracting. Lepak, Takeuchi and Snell (2003) find that more flexible employment arrangements via contract work can improve firm performance. Other papers find that the employment flexibility reduces labor costs, but also lowers labor productivity, sometimes having a negative effect on profit. For example, Michie and Sheehan-Quinn (2001) argue that relying on employment flexibility lowers firm performance from innovation perspectives. Kwon (2004) finds that the use of non-regular workers in Korea is negatively associated with profit. Lee and Kim (2006) also find that the employment flexibility has detrimental effect on firm performance in terms of labor productivity. This paper studies the effect of employment flexibility on firm performance in Korea and the UK. 3 The employment flexibility is often credited as a key to the economic success of the US and the UK with their low unemployment rates in contrast to other industrialized countries with higher unemployment rates. The Korean labor market is known with very rigid hiring and firing practices. Since the 1997 economic crisis, labor market rigidity has been pointed out as 3 Extending employment flexibility has far reaching implications for various aspects of labor relations too.

4 4 one of causes of the failure of the Korean economies. Introducing employment flexibility has been deemed essential to job creation necessary to solve the unprecedented massive unemployment since the economic crisis. Though there is no universally agreed definition of non-regular workers, it is widely believed that share of non-regular workers can reach to 30 to 50 percent of the whole labor force in Korea. We study whether employment flexibility affects the firm performance using samples from two surveys, the Workplace Panel Survey (WPS) 2005 for Korea and the Workplace Employment Relations Survey (WERS) 2004 for UK. Firm performance is measured by the profit per worker. Furthermore, we also study sales per worker and labor costs per worker. Obviously the focus of our interests is the impact of share of non-regular workers among all workers on firm performance measured by profit, sales and labor costs. II. Data In order to study the effects of employment flexibility on firm performance, we draw samples from two surveys, the Workplace Panel Survey (WPS) 2005 for Korea and the Workplace Employment Relations Survey (WERS) 2004 for UK. Both contain very rich information on the workplace including worker composition, regular full-time workers, part-time workers, fixed-term workers, etc.; financial information, e.g., profit, sales and labor costs; and labor relations. Table 1 shows the mean characteristics of the two datasets. 4 After excluding observations which do not have crucial information on profit, sales and costs, we have 1109 observations for Korea and 510 observations for the UK. For comparison between the two 4 For computing mean characteristics, we use the weights provided by the two datasets.

5 5 countries, we construct financial variables per capita, that is, financial variables divided by the number of total people employed in; profit per worker, sales (revenues) per capita, and labor costs per capita. The total employment includes not only regular full-time workers but also nonregular workers. Since the two datasets are surveyed in different years, it is not easy to directly compare the financial information, but roughly speaking, the sales per capita of UK firms are twice as large as those of Korean firms, while the labor costs per capita of UK firms is less than twice than the labor costs per capita of Korean firms, using the recent exchange rate of 1,865 won per one pound (October, 2007). Per capita profit shows that UK firms are much more profitable, more than ten times that of Korean firms' profit per capita. In short, Korean firms spend relatively more on labor costs, while revenues and profits are much lower than for UK firms. Our main variable of interest is the share of non-regular workers among total employment. The Korean firms employ 12.4% of total employee (110.76) with non-regular workers, while the share of non-regular workers among total workers (39.12) in UK firms is 33.4%. In terms of assets per capita, Korean firms are more than twice as large as UK firms. In terms of the composition of workers, UK firms hire more workers aged 50 or over and more female workers relative to Korean firms. In terms of occupational composition, Korean firms employ both blue-collar and white-collar workers in almost equal proportions, but the majority of UK workers are hired for white-collar jobs. 5 5 Unfortunately, the sum of shares of blue-collar, white-collar, and sales and service workers do not add up to 100%. This is because the numbers of these occupations do not add up to the total employment size.

6 6 Other information we examine is whether there is union in each workplace. Since the two countries have different union organizational system, this is not directly comparable. Still the table shows that the share of UK firms in which some of their workers are union members is higher than the unionization rate of Korean firms. Most establishments surveyed are single independent establishment firms in Korea (93%), while only 44.3% of the surveyed establishments are single independent establishment firms in the UK. In terms of formal status of the firm, the majority of Korean firms are public limited companies, while more than half of the firms in UK are private limited firms. Finally, industry composition also differs between the two countries. Korean firms are concentrated in the manufacturing industry (industry 1), while surveyed UK firms are concentrated in whole/retail trade, and transport, storage and communication (industry 4), and public administration, education, and health and social work (industry 6). In the next section, we report regression results. For the regression we use logtransformed variables. One problem is that profit can be negative; therefore, we lose some observations when we estimate (log-) profit function. The proportion of reporting negative profit is 11.9% for Korean firms and 26.3% for UK firms. The sample size reporting positive profit is 964 for Korea and 352 for UK. III. Non-Regular Workers and Firm Performance It is not obvious whether the use of non-regular workers positively contributes to firm performance. 6 This is because the use of non-regular workers may lower labor productivity 6 Of course, it is another issue, though not studied in this paper, whether the effect of increasing the role of non-regular workers improves the welfare of employees as a whole. It is obvious that

7 7 since non-regular workers are supposedly less trained and less attached to the jobs and turnover is more frequent. On the other hand, non-regular workers can lower the labor costs per capita, thereby directly improving the financial situation of the firm. The combined effect of using non-regular workers can be found by examining the profit function. We estimate regression equations to study the effect of no-regular workers on firm's performance measured by output per capita (labor productivity), labor costs per capita and profit per capita. The results are reported in Tables 2 (Korea) and 3 (UK). Since dependent variables are transformed using logarithm function, the sample size for studying the profit function is smaller than for the full sample. When we use those firms which report positive profits in order to have identical samples for estimating the three equations, the results are not substantially changed. Hence, we report regression estimates using full samples when estimating labor productivity and labor costs per capita. most of non-regular jobs pay less than regular full-time jobs and provide very little job security to workers. Therefore, non-regular jobs are detrimental to the welfare of workers as a whole, and non-regular job holders in particular. Others argue that the non-regular jobs can provide some benefits to workers; they can be a springboard toward regular full-time job; some types of non-regular works can provide wider choice sets to workers who need flexible working hours to balance work and home duties. In this case, workers may choose between rigid regular full-time jobs with higher wages, and more flexible non-regular jobs. However, there is a strong argument that the working at non-regular jobs is not a outcome of voluntary choice; non-regular workers are pushed into those jobs. A similar debate can be found when studying the causes of selfemployment (Co, Gang and Yun, 2005).

8 8 Independent variables consist of the share of non-regular workers and various indices of employee composition, and variables showing firm characteristics. When we look at estimates of the profit equation, capital intensive establishments measured by log assets per capita are positively associated with higher profit in both countries. Capital intensive establishments are also associated with both higher labor productivity and higher labor costs per capita in both countries. In Korea, larger establishments in terms of number of employees are also associated with higher profit. If there is a union present in both countries, then the profitability is lowered. 7 Labor union presence also significantly lowers labor productivity in Korea, but not in the UK. Also the noteworthy finding is that a larger share of blue-collar workers is associated with lower labor productivity, lower labor costs per capita and lower profit per capita in the UK, though there is no significant relationship in Korea. Of course, our main interest is the estimates of the share of non-regular workers. As expected, a larger share of non-regular workers significantly lowers labor productivity, and labor costs per capita in both countries. The difference between the two countries is found in profit function. In the UK, the coefficient of the share of non-regular workers is negative but not significant. However, in Korea, the coefficient of the share of non-regular workers is negative and significant. 8 It is possible that the benefits and costs of using non-regular workers in the UK 7 It is not clear that the union presence causes the lower profit, or there is unobserved heterogeneity of firms which encourages union presence in low performing firms. 8 Kwon (2004) finds identical results when studying Korean firm's performance and use of nonregular workers. Lee and Kim (2006) also find similar results for Korea when they study the relationship of the use of non-regular workers and changes in firm performance variables over time. On the other hand, Michie and Sheehan-Quinn (2001) find that employment flexibility can

9 9 may be cancelled out. However, the costs of hiring non-regular workers in terms of lowered labor productivity may outweigh the benefits of using non-regular workers in terms of lowered labor costs per capita in Korea. 9 IV. Conclusion Some people believe that it is beneficial for firms to hire non-regular workers since nonregular workers usually demand lower compensation than regular full-time workers. However, this view might be myopic considering that the contribution of non-regular workers to production is also likely lower than that of regular full-time workers due to their lack of training, and/or due to the characteristics of the jobs where non-regular workers are usually hired. Hence the net benefit of utilizing non-regular workers might not be as clear-cut as some people may presume. improve financial performance, but it hurts innovation activities, another aspect of firm performance. However, it is difficult to directly compare our finding with the finding of Michie and Sheehan-Quinn since they use managers' response to the question, "how does this site's current financial performance/profitability compare with other establishments in the same industry?". 9 For a robustness check, we use various combinations of a dummy variable of using the nonregular workers or not, the share of non-regular workers, and its square. In general, coefficients of the dummy variable and squared term of the non-regular workers turn out not significant. Still the share of non-regular workers is generally significant even when combined with other variables. Hence, we report regression results with the simplest specification of employing only the share of non-regular workers.

10 10 This paper has studied whether the use of non-regular workers contributes to the firm performance using firm level samples from the UK and Korea. Firm financial performance is measured by three variables, profit per capita, labor productivity, and labor costs per capita. Both the UK and the USA have been known for utilizing employment (numerical) flexibility extensively. Since the economic crisis in 1997, Korea has extended the employment flexibility, which has stirred social turmoil recently. The empirical study shows that as more non-regular workers are used, the labor productivity and labor costs per capita decrease in both countries. The greater use of non-regular workers does not affect firm's profit significantly in the UK, but it significantly lowers profit in Korea. It is premature to conclude that the use of non-regular workers causes lowering profitability in Korea. As selection bias literature warns us, it is still possible that the there are uncontrolled firm's characteristics which make less productive firms utilize non-regular workers more. Considering that the living standards of a large portion of non-regular workers have deteriorated, it is necessary to thoroughly investigate the benefits and costs of using non-regular workers on firm performance.

11 References 11 Arvanitis, S. (2005), "Modes of Labor Flexibility at Firm Level: Are There Any Implications for Performance and Innovation? Evidence for the Swiss Economy," Industrial and Corporate Change, 14, Co, C.Y., I.N. Gang, and M.-S. Yun (2005), "Self-Employment and Wage Earnings in Hungary during Transition," Review of Development Economics, 9, Kwon, S.-S. (2004), "The Effects of Contingent Employment on Organizational Performance - Empirical Analysis of Exchange Theory Perspective," Management Study, 33, (in Korean). Lee, S.-K., and J.-W. Kim (2006), "The Effect of Using Non-Regular Workers on Firm's Performance," Labor Review, 19, (in Korean). Lepak, D., R. Takeuchi, and S.A. Snell (2003), "Employment Flexibility and Firm Performance: Examining the Interaction Effects of Employment Mode, Environmental Dynamism and Technological Intensity," Journal of Management, 29, Miche, J., and M.Sheehan-Quinn (2001), "Labor Market Flexibility, Human Resource Management and Corporate Performance," British Journal of Management, 12, Nollen, S.D. (1996), "Negative Aspects of Temporary Employment," Journal of Labor Research, 17, Valverde, M., O. Tregaskis, and C. Brewster (2000), "Labor Flexibility and Firm Performance," International Advance in Economic Research, 6,

12 Table 1. Mean Characteristics 12 Korea UK Variable Mean Std. Dev. Mean Std. Dev. Profit per worker Sales per worker Labor costs per worker Use of non-regular workers Share of non-regular workers Size of workers Assets per worker Share of workers aged 50 or over Share of female workers Share of blue collar workers Share of sales and service workers Share of white collar workers Union Single establishment Private limited company Public limited company Other type of company* Industry 1* Industry Industry Industry Industry Industry Proportion of reporting negative profit Sample Size Note: 1. Profit, sales, labor costs and assets are reported in one million wons (Korea) and in 1000 pounds (UK). 2. Industry classifications are as follows: Industry 1: Manufacturing, Industry 2: Electricity, gas and water supply, and construction, Industry 3: Financial intermediation, and real estate, renting and business activities, Industry 4: Whole and retail trade, and transport, storage and communication, Industry 5: Hotels and restaurants, Industry 6: Public administration, education, and health and social work.

13 Table 2. Regression Estimates (Korea) Log-Labor Productivity Log-Labor Costs Log-Profit Est. S.E. Est. S.E. Est. S.E. Share of non-regular workers *** *** *** Log-size of workers *** Log-assets per worker 0.628*** *** *** Share of workers aged 50 or over * ** Share of female workers ** Share of blue collar workers Share of sales and service workers Union *** ** Single establishment Private limited company 0.569** *** Public limited company 0.490** *** Industry *** *** Industry ** Industry Industry * ** Industry *** Constant 1.740*** *** R-squared F-Stat 37.35*** 9.10*** 32.75*** Sample size ***, **, and * denote significance at the 1, 5 and 10 percent respectively.

14 Table 3. Regression Estimates (UK) 14 Log-Productivity Log-Labor Costs Log-Profit Est. S.E. Est. S.E. Est. S.E. Share of non-regular workers *** ** Log-size of workers Log-assets per worker 0.405*** ** ** Share of workers aged 50 or over Share of female workers Share of blue collar workers *** *** *** Share of sales and service workers ** Union * *** Single establishment Private limited company 0.529* Public limited company ** Industry Industry Industry *** *** Industry ** Industry Constant 3.004*** *** * R-squared F-Stat 9.49*** 8.93*** 3.85*** Sample size ***, **, and * denote significance at the 1, 5 and 10 percent respectively.