Summary of JOIE article by Silvio Traverso (University of Eastern Piedmont, Italy), Massimiliano Vatiero (University of Trento, Italy, and Università della Svizzera italiana, Switzerland) and Enrico Zaninotto (University of Trento, and FBK-IRVAPP-Trento, Italy). The full article is available on the JOIE website.
Since the 2000s, numerous European countries have implemented market-oriented reforms aimed at increasing external labor flexibility. These reforms have reduced legal and bureaucratic barriers to hiring and firing and expanded non-standard employment forms, including temporary, part-time, and freelance contracts as well as the use of temporary work agencies. The primary justification for these reforms has been to provide firms with greater flexibility in managing employment levels. However, such flexible labor contracts have faced criticism for potentially exacerbating labor market segmentation, increasing job insecurity, lowering wages, and contributing to the prevalence of working poor. Consequently, there have been growing calls within Europe to reassess or amend these reforms.
Concurrently, recent decades have witnessed the widespread adoption of automation technologies, which have expanded the range of tasks, functions, and activities that capital can perform. Therefore, labor market dynamics observed in recent years are influenced not only by reforms in labor institutions but also by technological advancements. Analyzing the interplay between these two domains – legal reforms and technological progress – is essential for designing policies that effectively address both the opportunities and challenges of this evolving landscape.
In this context, our study examines the relationship between the availability of flexible labor contracts and the adoption of automation technologies at the firm level. Central to our analysis is the hypothesis that automation and flexible labor are complementary. Specifically, we follow John Roberts’s definition of complementarity: “the two choice variables are complements when doing (more of) one of them increases the return of doing (more of) the other” (Roberts, 2007, p. 34; see also Pagano and Vatiero, in this journal).
The complementarity between flexible capital and flexible labor has been prominent in discussion on lean production, particularly in studies of the automotive industry during the 1990s, focusing on the complementarity between flexible technology and internal (functional) labor flexibility. In contrast, our paper examines whether a similar complementarity applies to external (volume) flexibility, proxied by flexible labor contracts.
Our empirical analysis, based on a panel of approximately 10,450 Italian firms, reveals a robust association between investment in automation and an increase in both the number and share of flexible labor contracts at the firm level. Specifically, the adoption of automation technologies is significantly correlated with an increase in non-standard labor contracts, suggesting a co-occurrence indicative of complementarity between the two domains (labor and capital). More specifically, our study yields the following findings:
- Increase in Flexible Employment: Firms that invested in automation experienced a significant increase in the number of flexible labor contracts. On average, these firms saw a 9% increase in flexible employees compared to non-automating firms.
- Higher Employee Turnover: Automation investments are associated with increased employee turnover, indicating more hiring and firing activities. This suggests that automation leads to greater workforce restructuring.
- Employment Growth: Contrary to common concerns that automation leads to job losses, our study finds that firms investing in automation actually increased their total employment by about 5%.
- Mediation Effect: A portion of the increase in flexible employment is attributable to overall employment growth. In other words, firms that automate tend to expand, and since new hires often start on flexible contracts, the proportion of flexible workers increases. However, net of this mediation effect, a direct effect not attributable to the hiring process remains substantial, accounting for about two-third of the total effect, and is statistically significant.
The propensity of firms investing in automation to utilize flexible labor contracts suggests a strategic aim to construct a more agile and responsive operational environment, enhancing efficiency and adaptability in response to rapidly evolving market conditions. For instance, in the face of demand fluctuations, the firm can leverage both flexible contracts, which allow rapid workforce adjustments, and the production process flexibility enabled by automation technologies.
This interpretation aligns with hypotheses and findings of Traverso et al. (2023), who emphasize the crucial role of flexible labor market legislation in driving automation adoption, particularly in the context of robotics.
From our study, we derive important implications for the debate on labor institution reforms. First, policymakers should carefully consider the complementarity between labor flexibility and automation. Overlooking this relationship could result in efficiency losses, particularly given the current widespread diffusion of automation technologies. These technologies depend on flexible labor arrangements to fully unlock their potential, as they allow firms to adapt quickly to demand fluctuations and technological requirements. Second, it is crucial to devise policies that balance the need for worker protection with maintaining the operational flexibility required to sustain efficiency. Policymakers must find ways to balance the efficiency gains from automation with protections for workers, for instance, by encouraging skill development programs to help workers transition into stable employment.
In conclusion, our findings underscore the necessity for a nuanced approach to labor policy that acknowledges the intricate relationship between automation and labor contract flexibility. Such an approach should aim to harness the benefits of automation while safeguarding workers’ rights and promoting equitable labor market institutions and outcomes.
References
Pagano, U. and Vatiero, M. (2015) Costly institutions as substitutes: Novelty and limits of the Coasian approach. Journal of Institutional Economics, 11(2):265–281.
Roberts, J. (2007) The modern firm: Organizational design for performance and growth. Oxford University Press.
Traverso, S., Vatiero, M., and Zaninotto, E. (2023) Robots and labor regulation: a cross-country/cross-industry analysis. Economics of Innovation and New Technology, 32(7):977–999.