Employment and labour hoarding: a production function approach

Abstract

Purpose This paper aims to test the hypothesis that the effect of production slowdown on labour demand can be muted by labour hoarding. Design/methodology/approach This study adopts a production function approach, using data from Malta, a small state in the EU. Findings The results confirm the hypothesis and indicate that firms are normally prepared to employ and dismiss more workers in the long run than in the short run. Practical implications This finding has important implications for developed countries, including that labour hoarding can be of certain relevance in times of economic slowdown as shocks are absorbed by internal flexibility. Originality/value The results of this study add on to the existing literature in two ways. First, this study compares two industries –manufacturing and financial services– for which the former sector received support to hoard labour after the financial turmoil of 2008. Consequently, the dominance of labour hoarding in manufacturing relative to financial services is uncovered and the effect of hoarding practices on labour demand is estimated. Second, Malta is an interesting case because it is one of the smallest economies in the world and faces a high degree of vulnerability because of constraints associated with small size and insularity. As a result, firms adopt policy-induced measures to minimise adjustment costs.

Labor Hoarding: An Old Phenomena in Modern Times? Case Study for Eu Countries

“…The concept of labor hoarding is based on the assumptions of the microeconomic theory of companies (Vella, 2018). Companies optimize their decisions over a long period of time, therefore decisions regarding employment costs, training and dismissals should also be optimized over a long period of time.…”

“…In the macroeconomic models of the labor market, labor hoarding is part of the demand for labor (Ehrenberg & Smith, 2012;Vella, 2018). Taking into account the costs of employment, dismissal and training of employees leads to a milder adjustment of employment to changes in production, than would result from the models omitting the costs of labor hoarding.…”

“…The consequence of this is the observation regarding the procyclicality of work productivity. Models including costs of employment, training and dismissal of employees are modified by adjusting hourly work (Lucas, 1970;Ehrenberg & Smith, 2012;Vella, 2018). Employment, in this case, reacts more slowly to decreasing production and this reaction is delayed (Ehrenberg & Smith, 2012;Vella, 2018).…”

“…Models including costs of employment, training and dismissal of employees are modified by adjusting hourly work (Lucas, 1970;Ehrenberg & Smith, 2012;Vella, 2018). Employment, in this case, reacts more slowly to decreasing production and this reaction is delayed (Ehrenberg & Smith, 2012;Vella, 2018). A reasonable adjustment in the conditions of production fluctuation is the change in the number of hours worked, and not the change in employment size, which leads to a decrease in procyclicality of labor productivity.…”

“…As a consequence, the economy's response to changed conditions is delayed. One of the concepts of optimization of company decisions on human resources management in the conditions of economic slowdown is labor hoarding (Barth et al, 2017;Biddle, 2015;Burnside et al, 1993;Hart, 2019;Vella, 2018). This phenomenon is based on an non-immediate adaptation of employment to changes in production volume.…”