by Dr Sunwoo Hwang, Research Associate, Cambridge Centre for Finance and Cambridge Endowment for Research in Finance
There has been a rapid increase in contingent employment worldwide. As of 2015, it accounts for 15.8 per cent of the US labor force, up from 10.7 per cent in 2005 (US Bureau of Labor Statistics). In Europe, contingent workers make up an average of 43.3 per cent for 28 European Union countries (OECD Labor Force Statistics). Contingent work is an umbrella term that represents numerous non-permanent employment arrangements. Despite these trends, little is known about the implications of contingent employment on firm outcomes. There could be certainly benefits such as flexibility in the use and reallocation of labor, which may lower operating leverage and fuel investment and growth. However, there may also be costs. Job insecurity, as compared to regular employment contracts, may discourage employees from engaging in value-enhancing activities such as innovation that typically requires a long-term commitment.
Hwang (2020) asks whether contingent employment affects the innovation incentives of employees. The paper finds that converting temporary contracts to permanent ones has a positive effect on corporate innovation conditional on long-term rewards in place. The intuition that may explain these findings is that excessive termination following short-term failure and few rewards for long-term success, faced by contingent workers, discourages innovation (Manso, 2011). Note that this paper focuses on the contingent workforce in core functions. It speaks of neither low-skilled contingent workers who may not innovate (e.g., janitors) nor high-skilled (voluntary) ones who may innovate yet be insensitive to job security given their superior outside options (e.g., consultants).
To answer the question, the paper exploits a novel experiment available from Korea. It allows us to compare firms that shifted contingent contracts to regular contracts with an otherwise identical set of firms that continued to use contingent labor. The experiment is composed of a contingent arrangement unique in the country, under which contingent workers do the same core tasks as regular employees hired as the labor market was strong, and a Supreme Court ruling against the arrangement.
The affected contingent workers are the so-called in-house subcontracted (IS) workers. They are similar to agency temps yet different in that they are hired through in-house subcontractors, not staffing agencies, and work for the main contractor almost permanently. Note in-house subcontractors are often created for the sole purpose of supplying the IS workers. The IS workers are unsecured because they cannot be reallocated to other firms if the main contractor stops subcontracting, which in turn closes an in-house subcontractor. Business failure is a legitimate reason for discharge. The IS workers are likely innovators because the vast majority of patented innovations are from traditional manufacturing industries, these innovations depend on the basic education the IS workers have received (D’Acunto, 2014), and the IS workers gradually have replaced their secured colleagues as the labor market weakens over time.
To my knowledge, Hwang (2020) provides the first evidence that contingent employment negatively affects the rate at which R&D investment translates to patented innovations at the employee level. Moreover, it shows that an optimal innovation-motivating scheme (Manso, 2011), characterized by tolerance for short-term failure and rewards for long-term success, also governs employees who execute innovation. Prior research has focused on managers who finance innovation. This paper’s findings inform debates on the costs and benefits of contingent employment and, specifically, corporate decisions as to the management of human capital which produces innovation. The findings have timely policy implications as the labor market representation of contingent labor is large and growing. Furthermore, the pandemic has hit contingent workers harder with harsher pay cuts or layoffs, and the post-corona era is likely to demand more of both contingent labor and innovation.
D’Acunto, Francesco (2014) “Innovating to Invest: The Role of Basic Education” Semantic Scholar