Temporary contracts and employee effort.

Abstract Temporary contracts provide employers with a tool to screen potential new employees, and have been shown to provide "stepping stones" into permanent employment for workers. For both reasons workers on temporary contracts have an incentive to provide more effort than permanent employees. Using indicators for unpaid overtime work and absences taken from the Swiss Labor Force Survey we present evidence that temporary workers indeed provide higher effort than permanent employees: Their probability of working unpaid overtime exceeds that of permanently employed workers by 60 percent. We show the heterogeneity of this effect across different types of temporary contracts, investigate differences between men and women, and discuss the relevance of endogenous selection into temporary employment. Keywords: temporary work, contract-related incentives, absenteeism, overtime, moral hazard, career concerns JEL Code: J24, J41, M50, C25 Introduction An important characteristic of employment contracts is whether they are permanent or temporary. Since temporary employment as a share of total employment recently has risen in a number of countries it has created increased scientific attention (cf. OECD 2002 This study adds to the literature in several regards. First, it continues the micro-level analysis of temporary contracts initiated by 5 Second, we provide empirical evidence of the extent of contract related incentive effects, an issue neglected in prior discussions. We carefully describe the behavior of individuals employed in different types of temporary contracts to clarify that there are important heterogeneities. Finally, we present evidence for the interesting case of Switzerland, a country similar to the United Kingdom and the United States in that employment protection is limited. Our results show that temporarily employed individuals are significantly more likely to provide unpaid overtime work. On average their overtime work propensity exceeds that of permanently employed workers by 60 percent. The findings are robust to changes in sample and specifications, and yield no clear differences in the behavioral responses of males and 5 Hagen (2003) also confirms the stepping stone hypothesis using German data. 3 females. We investigate the relevance of endogenous selection into temporary employment, and describe the heterogeneity of our findings across different types of temporary employment. Institutions, Prior Evidence, and Hypotheses Compared to other developed countries the labor market in Switzerland is left quite unregulated. Employment protection in permanent contracts is weak, as even after 8 years of tenure layoff notice periods are only 2 months, reaching the maximum of at least 3 months after 9 years of tenure. 6 Given the limited employment protection for permanent contracts it may be less likely in Switzerland compared to other countries that temporary contracts are used as buffers against cyclical fluctuations by employers. Temporary contracts can extend over many years without limitations, and only must grant a layoff notice period of 6 months when they exceed a duration of 10 years. If temporary contracts are used to circumvent the stricter regulations of permanent contracts the temporary contracts will be looked at as permanent contracts. However, given the very limited extent of regulation for permanent contracts in Switzerland there is little reason to use temporary contracts to avoid the additional regulation. 7 Since the incentive effect of temporary contracts on worker effort has rarely been investigated before, we review related studies and then discuss our hypotheses. Guadalupe 6 The OECD (1999) provides a ranking of the overall strictness of employment protection for regular employment for the late 1980s and the late 1990s. Out of 27 countries Switzerland ranks fifth (after the United States, the United Kingdom, Canada, and Australia) in both periods, rendering it one of the countries with the lowest employment protection. 7 In his textbook on Swiss labor laws Rehbinder (2002) even points out that the liberal dismissal rules do not meet the more restrictive requirements of the European Union and similarly contradict Agreement 158 of the International Labor Organization, which requires stricter employee protection. 4 (2003) seems to be the first to address the different types of incentives following from permanent versus temporary contracts: While she shows that temporary contracts cause significantly higher accident rates we investigate contract effects on employee effort. Generally, the effect of contract-related incentives on employee behavior has found attention in the empirical literature on the role of employment protection as well as in research on sickpay related moral hazard. The studies evaluating the incentive effects of employment protection utilize institutional regulations to identify the relevant effects. Ichino and Riphahn Our study analyses effort responses which are not necessarily driven by labor market regulations but are related to the possibly purely market-driven duration of contracts. These can be evaluated by comparing the behavior of workers on temporary and permanent contracts. As long as temporary employment contracts are less attractive than permanent ones 5 temporary workers have an incentive to provide high levels of effort. 8 A first reason is that firms tend to use temporary employment to screen potential permanent employees prior to committing to a binding contract. So if temporary workers want to obtain a permanent employment contract with typically higher wages they need to pass this employer screening. Second, there is considerable direct evidence that temporary contracts serve as stepping stones into more attractive employment contracts -also with other than the current employer. However, these incentive mechanisms may not characterize all types of temporary contracts in the same way. Another interesting issue concerns the difference between male and female temporary workers. Additional aspects may affect behavioral differences between the sexes: Discrimination might influence the selection of individuals into fixed term versus permanent jobs. If for given ability men are more likely to find permanent employment, then -on average -women in temporary employment should be of higher ability. If high ability is correlated with a career orientation then these high ability women may respond to incentives and provide additional effort. 10 In this case women in temporary employment ceteris paribus may provide more effort than men. However, the conclusion that the experience of discrimination results in the subsequent provision of high effort may not be convincing: If high ability has not been rewarded in the past high effort now may be in vein as well. These are three gender-specific mechanisms where the first and the last should cause lower and the second higher effort among women compared to men. Below we investigate the empirical evidence on this question. Overall our empirical analysis seeks to test the following hypotheses: H1: Workers in temporary employment provide more effort compared to workers in permanent contracts. H2: Temporary workers on different types of temporary contracts show different levels of effort. H3: Males and females provide different levels of effort in response to temporary employment incentives. 10 Booth et al. (2002c) also discuss active discrimination on the part of the employer as an explanation for differences between the sexes. 7 Data and Empirical Strategy Dataset and Sample The data for our analysis are taken from six annual waves (1996 -2001) Key Dependent and Explanatory Variables We consider two effort indicators as dependent variables, which are established in this literature: The first measures whether the worker provides unpaid overtime hours, 11 the second describes whether a person missed work for the entire week prior to the survey due to illness, accident, personal or family matters, or "other" reasons. 12 Both measures are binary 11 Respondents are asked whether it happens frequently or at least sometimes that they have to work longer hours than spelled out in their contract. If they agree a subsequent question asks whether this is typically remunerated financially, in leisure, or not at all. Those indicating that overtime work is typically not remunerated provide unpaid overtime work. Based on the SLFS information on the type of temporary contract we distinguish five contract types. The contract types describe (i) seasonal and casual employment, (ii) public sector sponsored employment programs, (iii) internships, and (iv) "advanced temporary contracts" combining temporary substitute workers, fixed term project work, probationary employment, temporary employment agency workers, and "other" temporary contracts. 14 Public sector sponsored programs are designed to reintegrate previously unemployed workers in the labor market. Internships are temporary contracts with typically low or no pay where the intern intends to learn about the workings of a company or agency. Contract type (v) describes observations with missing contract type information. We expect that the incentive to provide effort is highest among those with the highest probability of company screening, i.e. categories (iii) and (iv), and lowest among groups (i) and (ii) where workers are either unlikely to reapply for employment or where promotions are not possible. temporary contracts. It yields differences in a variety of dimensions: Temporary work is more frequent among the young, among females, non-married, and foreign workers. The educational patterns are nonlinear in that temporary workers are more likely to be in the lowest and the highest educational categories compared to those employed permanently. Despite conditioning on full-time employment we find a higher number of weekly hours worked (contractual and overtime) for temporary workers. The distribution of workers across firm size categories does not seem to differ by contract type, but permanent workers have much longer tenure. 15 Given the availability of panel data for some of our observations it is interesting to measure the probability of remaining in temporary employment over time. The period-toperiod probability of leaving temporary employment for a permanent job amounts to 26 percent in our sample. The reverse probability of leaving permanent employment for a temporary job is low at 0.9 percent. 16 Given that permanent and temporary contracts differ in a number of dimensions it is interesting to describe effort levels by contract type. The first row in Panel A of The last five columns of 17 Also when disaggregating by sex effort seems to be lowest among those in public programs. Empirical Strategy The purpose of our analysis is to test the hypotheses derived in section 2. Hypothesis 1 (H1) claims that workers in temporary contracts provide more effort than those permanently employed. This is tested by regressing our effort outcomes on an indicator of temporary employment in random effects probit models. To ensure that the measured outcomes are not due to composition effects, the model considers control variables describing the individual worker (age, sex, marital status, nationality, health, level of education), the job (tenure, firm size, industry, occupation), and survey year effects. In step 2 of the analysis we test H2, which proposes that effort responses of temporary workers should vary by type of contract. We expect higher effort among interns and those on advanced temporary contracts. This is formally tested by substituting a set of type of contract indicators for the overall indicator of temporary employment in our models. The last step of the analysis investigates differences in responses to incentives by gender. We first add interactions between the temporary contract and female sex indicators and then discuss more refined estimation approaches. 16 Both figures represent lower bounds of the true shares because we do not observe the transitions of those individuals who drop out of the survey due to panel rotation. 17 The high effort levels of workers in the last column of 11 Results The results of the "baseline" regressions for the overtime and absence indicators are presented in The temporary contract indicator yields the expected coefficient in the model for overtime work: Individuals on temporary jobs are significantly more likely to work unpaid overtime hours than individuals on permanent contracts. In fact, controlling for the other variables the difference in the predicted probabilities even exceeds that presented in The regression suggests that holding everything else constant the probability of overtime work under a temporary contract exceeds that under a permanent contract by 60.49 percent (see bottom row and notes of 18 The other results indicate that the propensity to work unpaid overtime increases significantly with age and education, it is higher for males, Swiss nationals, for married individuals, and for those free of grave health shocks. 19 Also, overtime is significantly and positively correlated with tenure and negatively with firm size, and it varies significantly by occupation and industry. In contrast to the estimation of overtime work, the model for absences does not yield a statistically significant difference by contract status. While the negative coefficient indicates a lower absence probability for those on temporary contracts, the coefficient is insignificant. 18 The SLFS offers information on the average number of unpaid overtime hours worked during the last calendar year. To test the robustness of our results we ran linear regressions on this outcome for the subsample of workers with at least one year of tenure, i.e. those who were employed under the same contract during the observation period: The results confirm that the temporarily employed provide significantly more unpaid hours of overtime work than those on permanent contracts. 19 The measure for a health shock is available only for the 1998 -2001 surveys and describes whether a worker has ever experienced a health based work absence of more than half a year. 12 This finding is robust across specifications and estimators, and remains unchanged when more detailed indicators and interactions of the temporary work indicator are considered. 20 This same result of no significant difference in absence rates of temporary and permanent workers was found for the case of Spain by Jimeno and Toharia (1996). However, they could show that composition effects determined this outcome: Since temporarily employed workers were employed in industries and occupations with higher accident rates, these accident related absences affected the overall comparison between permanent and temporary workers. When the authors controlled for occupation and / or industry specific accident rates, the overall absence rates showed significant differences between permanent and temporary employees. In order to test whether such compositional effects possibly explain the lack of a significant difference in the absence rates of permanent and temporary workers in our case as well, we obtained industry-specific accident rates for Switzerland. 21 The regression of absence probabilities in 22 13 We conclude that in our data temporary workers differ from permanently employed colleagues with respect to unpaid overtime work but not regarding absences. This can be interpreted to mean that either temporary workers do not make a special effort to avoid absences or permanent workers miss work already at very low levels. By international comparison Swiss absenteeism rates are indeed very low

Temporary Contracts and Employee Effort

Temporary contracts provide employers with a tool to screen potential new employees and have been shown to provide ‘stepping stones’ into permanent employment for workers. For both reasons, workers on temporary contracts have an incentive to provide more effort than permanent employees. Using indicators for unpaid overtime work and absences taken from the Swiss Labor Force Survey, we present evidence that temporary workers indeed provide higher effort than permanent employees: their probability of working unpaid overtime exceeds that of permanently employed workers by 60%. We show the heterogeneity of this effect across different types of temporary contracts, investigate differences between men and women, and discuss the relevance of endogenous selection into temporary employment.absenteeism; career concerns; contract-based incentives; M50; moral hazard; overtime; temporary work