Growth and Labor Market Composition

Nobuyuki Kanazawa1

20th Labor Market Conference

September 16, 2017

1 Hitotsubashi Institute for Advanced Study. The data for this analysis, the Japan Household Panel Survey (JHPS/KHPS), was provided by the Panel Data Research Center at Keio University.

Motivation

I Large increase in the share of “temporary workers” in many OECD

countries I “temporary workers” often have weaker employment protection, paid lower wages, receive less generous benefit, and experience slower rate of wage growth. I Past literature attributes the cause of this trend to legislative changes

(e.g. Cahuc et al. [2016], Boeri et al. [2011], and Blanchard and Landier [2002]) I This paper: understand this increasing trend as an equilibrium outcome

of economic slowdown

Part-time employment rate and real GDP growth rate

Notes: due to data availability, averages are over 1) 1986-1995 for New Zealand and Portugal; 2) over 1987-1995 for Netherlands; 3) over 1988-1995 for Turkey; and 4) over 1989-1994 for Finland, South Korea, and Norway. Part-time workers are defined as the workers who spend less than 30 hours per week in their main job.

Motivation: Case of Japan Real GDP growth rate (%)

TFP growth rate (%)

Share of temporary workers (%)

Mechanism: Simple Model

I Key channel: difference in the rates of wage growth I Two types of jobs: permanent jobs and temporary jobs I Permanent jobs pay wperm initially. From the next period on, their wages 0 increase to wperm .

I Temporary jobs pay wtemp forever I Wages of both sectors will increases at the common rate of γX .

Mechanism: Simple Model I Value of a permanent worker:

Wperm = wperm + βγX

0 wperm , 1 − βγX

(1)

I Value of a temporary worker:

wtemp Wtemp = 1 − βγX   wtemp = wtemp + βγX 1 − βγX I An unemployed worker is indifferent when: Wperm = Wtemp 0 This condition requires that wperm > wtemp > wperm

I When γX decreases, the value of perm decreases more:

−

0 βwperm dWperm βwtemp dWtemp =− <− =− dγX (1 − βγX )2 (1 − βγX )2 dγX

(2) (3)

Summary of this paper I Goal: Understand the effect of economic slowdown on increasing share of

temporary workers I Key channel: difference in the rates of wage growth

1. I document differences in the characteristics of permanent and temporary jobs. Esp. difference in the wage growth. 2. I build a search-and-matching model that incorporates I Dual labor market: “permanent jobs” and “temporary jobs” I Heterogeneous workers’ skills that evolve according to their employment status ⇒ different rates of wage growth I labor-augmenting technology, X

I Findings: I

About 64% of the observed increase in the share of temporary workers in Japan can be explained by the slowdown of its economy.

Literature

I On growth and unemployment: Aghion and Howitt [1994], Pissarides [2000], Pissarides and Vallanti [2007] I On use of temporary workers in Japan: Asano et al. [2013] Esteban-Pretel et al. [2011] I On temporary and permanent employment: Acemoglu [2001], Alonso-Borrego et al. [2005], Caggese and Cu˜ nat [2008], Miyamoto [2016], Wasmer [1999], Blanchard and Landier [2002] and many others.

Dual Labor Market: Permanent Jobs and Temporary Jobs

I Temporary workers are defined as workers who fall into one of the

following categories: 1. part-time worker 2. dispatched workers 3. contract workers 4. commission staff 5. other types of workers who are not permanent employees I Key difference between permanent and temporary jobs I Rates of wage growth I Job tenure I On-the-job training

Rate of Wage Growth log(wage)i,t =α0 + α1 tenure + α2 tenure2 + β0 × IP + β1 tenure × IP + β2 tenure2 × IP + Xi,t γ + i,t I IP is the indicator for permanent employment I Xi,t includes age, age squared, individual fixed effects, and fixed effects for year, industry, and region. Return on working Median years of job tenure Annual wage growth for workers with 3 yrs of tenure Difference in wage growth for workers with 3 yrs of tenure Annual wage growth for avg. workers with 11 yrs of tenure Difference in wage growth for avg. workers with 11 yrs of tenure

Permanent 11 yrs

Temporary 3 yrs

1.005%

0.027%

0.978% 0.946%

-0.02%

0.971%

Observations

14,303

R2 p-value for F -test (β1 = β2 = 0)

0.1018 0.0337

Data are from KHPS and JHPS, 2004-2013. For each year, the sample is restricted to permanent and temporary workers who continued working at the same firm from the previous year.

Difference in “on-the-job” and “off-the-job” training opportunity “on-the-job” and “off-the-job” training

Source: Basic Survey of Human Resources Development

Model: Quantitative analysis I DMP 1. 2. 3.

model with dual labor market workers’ heterogeneous skills, h labor-augmenting technology, X

I Exogenous job separation, No job-to-job transition I Two labor markets: 1) permanent market 2) temporary market Each labor market is associated with different market-tightness and job-finding prob. Permanent v.s. Temporary jobs Firing Costs Permanent

Temporary

φ

0

Production fun. yperm =

ytemp =

×

X |{z}

h |{z}

labor-aug. tech.

skill level

×

¯temp A | {z }

X |{z} labor-aug. tech.

common tech.

Human Capital Accumulation, Balanced Growth, Wages

¯ which then evolves according to their I Workers are born with skill, h ∈ (h, h), employment status I Permanent: h increases by ∆h with the prob. πperm I Temporary: h increases by ∆h with the prob. πtemp I Unemployed: h deteriorates by ∆h with the prob. πu I Labor-augmenting technology, Xt , grows at the rate of γX I All exogenous variables grow at the constant rate of γX ⇒ Balanced growth I A worker and a firm negotiate the wage each period and split the joint match surplus according to Nash Bargaining

Unemployed Worker’s and Worker’s Value Function U (h): present value of unemployed worker with h skill-level.   U (h) = b + β(1 − ν)γX max E Uperm (h0 ), Utemp (h0 ) where Uperm (h) =

N (h) − U (h)) + U (h) f (θperm ) (Wperm | {z }

job finding prob

Utemp (h) =

f (θtemp ) (Wtemp (h) − U (h)) + U (h) | {z }

job finding prob

k (h): present value of a permanent worker Wperm

h i k k E Wperm (h) = wperm (h) + β(1 − ν)γX E (1 − δperm )(Wperm (h0 ) − U (h0 )) + U (h0 ) for k = {New, Existing} Wtemp (h): present value of a temporary worker h i Wtemp (h) = wtemp (h) + β(1 − ν)γX E (1 − δtemp )(Wtemp (h0 ) − U (h0 )) + U (h0 )

Value of Job and Free Entry Jperm (h): present value of a permanent job k k Jperm (h) =yperm − wperm (h) h i E β(1 − ν)γX E (1 − δperm )(Jperm (h0 ) − V ) + V −δperm φ

for k ∈ {N, E} Jtemp (h): present value of a temporary job h i Jtemp (h) = ytemp − wtemp (h) + β(1 − ν)γX E (1 − δtemp )(Jtemp (h0 ) − V ) + V

Vperm : value of posting a vacancy in the permanent market Z h i N (Jperm (h) − Vperm )dµh Vperm = −κperm + β(1 − ν)γX E q(θperm ) perm + Vperm | {z } h job filling prob

Vtemp : value of posting a vacancy in the temporary market Z h i Vtemp = −κtemp + β(1 − ν)γX E q(θtemp ) (Jtemp (h) − Vtemp )dµh temp + Vtemp | {z } h job filling prob

Free entry condition drives down the value of vacancies to zero: Vj = 0 for j ∈ {perm, temp}

Simulated Method of Moments Model is calibrated to match data in monthly frequency Externally calibrated parameters: Externally calibrated parameters Variable R β δperm δperm γX θperm θtemp ψ η ν h h ∆h σh

Description Interest Rate Discount rate Separation rate for perm workers Separation rate for temp workers Technological growth rate Labor market tightness in perm sector Labor market tightness in temp sector Matching elasticity Nash bargaining power for workers Retirement probability min skill level max skill level Human capital increment std. of initial skill dist.

Value / Source 1.030721/12 , real interest rate between 1988-1994 1/R 0.0035 0.0071 1.03651/12 , growth rate between 1985-1994 1.0, normalization 2.24, Miyamoto [2016] 0.6, Miyamoto [2011] 0.6, see text 0.00208, see text 0 5 0.0336, 150 equispaced grid 0.494, see text

Targeted moments Model Output

Moment

Data (Target)

Job finding rate Ratio of job finding rate: perm/temp

0.155 0.450 0.6729 (40% of average wage) 0.0900 1.879 1.706 1.6808 1.0000%

Unemployment income Share of temporary workers Wage distribution, p90/p50 Wage distribution, p50/p10 Average wage ratio: perm/temp Average return on job tenure for perm workers

0.1551 0.4496 0.6704 0.0908 1.8851 1.7497 1.3784 1.0536%

Internally calibrated parameters Variable

Description

Value

φ b

Firing cost Unemployment income Matching efficiency in permanent sector Matching efficiency in temporary sector Productivity of temporary worker Probability of skill upgrade for perm sector Probability of skill upgrade for temp sector Probability of skill deterioration for unemployed

15.619 0.6704 0.1431 0.2305 1.2625 0.0382 0.0104 0.0209

m ¯ perm m ¯ temp A πperm πtemp πu

Results Moments comparison under two regimes

Technological growth rate

(1) γX = 1.03651/12

(2) γX = 1.0060871/12

Job finding rate Job separation rate Share of temporary worker Average wage ratio: perm/temporary Unemployment rate Market tightness in perm. sector Market tightness in temp. sector Job-finding rate in perm. sector Job-finding rate in temp. sector

0.1551 0.0038 0.0908 1.3784 3.67% 1.000 2.240 0.1431 0.3183

0.1626 0.0041 0.1806 1.4363 3.69% 0.9268 2.0843 0.1388 0.3092

Results Moments comparison under two regimes

Technological growth rate

(1) γX = 1.03651/12

(2) γX = 1.0060871/12

Job finding rate Job separation rate Share of temporary worker Average wage ratio: perm/temporary Unemployment rate Market tightness in perm. sector Market tightness in temp. sector Job-finding rate in perm. sector Job-finding rate in temp. sector

0.1551 0.0038 0.0908 1.3784 3.67% 1.000 2.240 0.1431 0.3183

0.1626 0.0041 0.1806 1.4363 3.69% 0.9268 2.0843 0.1388 0.3092

Decomposing the change in unemployment rate: perm

∆U = U1 |

temp

perm

∆Share

+ U1 {z

∆Share

temp

}

perm

+ Share1 |

reallocation effect

+ ∆Share |

perm

∆U

perm

+ ∆Share {z

temp

∆U

temp

}

= −0.086% + 0.116% −0.004% = 0.026% | {z } | {z } | {z } within

perm

covariance

temp

+ Share1 {z

within effect

covariance effect

reallocation

∆U

∆U

temp

}

Value of Unemployment

Skill distribution

Conclusion

I This paper studied the relationship between growth and the composition of the labor market. I I found that permanent workers’ rate of skill accumulation plays a key role in propagating the effects of growth on labor market composition. I My model attributes as much as 64.3% of the observed increase in the share of Japan’s temporary workers to that country’s slow growth.

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