How do firms attain internal and external flexibility of employment?

Abstract

While firms in many developed countries increasingly rely on workers with nonstandard contracts, the underlying economic factor distinguishing workers on standard contracts from those on nonstandard contracts is poorly understood. Thus, we explore the asymmetric employment and wage adjustments of these two groups to examine whether differences in the importance of firm–worker relation specificity between the two types of workers is a fundamental source of the heterogeneity. We use unique firm-level panel data that records the number of dispatched workers from temporary help agencies, matched with payroll records. Leveraging the exogenous shock that stems from exchange rate fluctuation and heterogeneous trade exposure among firms, we find that firms absorb temporary shocks by adjusting the number of dispatched workers while refraining from changing the employment of in-house workers. Instead, firms opt to change the wages of in-house workers by adjusting their yearly bonuses, rather than their monthly wages.