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Temporary vs. Permanent Employment: Is There a Wage Penalty?

Gail Pacheco & Bill Cochrane

Over recent years there has been an upsurge in the number of workers ending up in temporary employment (see for example De Cuyper et al., 2008). There are a number of reasons for the upsurge ranging from free choice whereby workers choose temporary work because of inherent and preferable charateristics such as greater flexibility whereas others end up in temporary employment because of a lack of suitable permanent employment opportunities. Many workers enter temporary employment hoping that it will eventually turn into a permanent contract.

In NZ, approximately one in ten employees were working in temporary jobs, based on the survey of working life 2008 and 2012 waves (SOWL). In general, workers on a temporary contract were more likely to be female (62%), younger, of Maori or Pacific ethnicity (15%), have lower educational attainment, be a sole parent, working part-time (51%), and work in agriculture, forestry, fishing; accommodation and food services; or education and training.

A recent study by Comi and Grasseni (2012)[1] analysed the wage gap between temporary and permanent jobs across Europe, and found evidence that permanent workers with the same characteristics as their temporary counterparts would receive a wage premium in almost all countries considered. This result was also consistent across the wage distribution, and suggested widespread discrimination against temporary workers. Their finding is in line with the ‘insider/outsider’ argument, whereby there is greater employment protection for permanent workers (the insiders), relative to temporary employees (the outsiders). Further weight was placed on this argument when it was also found that the wage gap appeared to increase, with greater levels of employment protection.

Employment protection legislation in NZ has weakened since 2008[2], with the introduction of the 90-day trial period for new employees (in 2010), and political intervention in the Hobbit Film dispute[3] via the Employment Relations (Film Production Work) Amendment Bill. It is therefore timely to investigate the existence of a temporary wage penalty in this country.

Of course on the face of it, it is clear that temporary workers are lower paid than their permanent counterparts. Using SOWL, we find the hourly wage for a temporary employee is $17.4, and for a permanent employee is $20.8. However, much of this gap is due to observed differences in the characteristics of the worker, their job and their occupation / industry. For instance, we find that 42% of this gap is explained by personal characteristics such as age, gender, ethnicity and qualification; and another 51% is explained by characteristics of the job, occupation, and industry; leaving a mere 7% of the wage gap as unexplained, when using standard decomposition techniques.

It is important to note that temporary employment in NZ encompasses a diverse range of jobs, with fixed term workers being very similar to permanent employees, and distinctly different to casual / temp agency, or seasonal workers. In fact, we find no noticeable wage difference between the average fixed term contractor and permanent employee.

Besides decomposing the wage difference between temporary and permanent workers, another method to assess the likelihood of wage discrimination against temporary workers is to be able to compare like with like. However, as natural experiments are unavailable, economists are increasingly relying on propensity score matching (PSM). This involves simulating a randomized experiment, and matching observations in the treated group (in this case, the temporary workers) with the control group (the permanent workers), such that matched individuals are as alike as possible. This provides a valid counterfactual – such that we can ask the question, if worker A, had no change in characteristics (i.e. no change in education, age, etc.), and moved from permanent to temporary work, would there be a wage penalty involved in this move?

Using PSM we find at most an average wage penalty of approximately 10% when comparing workers with similar characteristics in all respects, except for their employment type. The penalty found is equivalent to approximately $40 per week for a full-time load of 40 hours per week. It is noteworthy that the penalty varies markedly across the employment types. If comparing seasonal workers with permanent workers with the same characteristics, the penalty is around 7%, and this rises to 13% and 14% for temp agency and casual workers respectively. Thus showing casual employees exhibiting the most obvious signs of wage discrimination, relative to their permanent counterparts. As expected, the difference between fixed term and permanent workers with the same characteristics is a mere 2% wage penalty, and even this is found to be statistically insignificant.

In conclusion, we find a modest but statistically significant wage penalty for the average worker engaged in temporary work. This penalty varies greatly between different categories of temporary work, from close to 0 to 13-14%. It is perhaps useful to consider what this means in practice; taking a permanent employee working 40 hours a week for $20.8 per hour and comparing them to a similar worker in temporary work the penalty amounts to around $58.00 per week or about the amount it costs to feed a 5 year old child for a week[4].

 


 

 

References

Comi, S. and Grasseni, M. (2012) “Are temporary workers discriminated against? Evidence from Europe,” The Manchestor School 80: 28-50.

De Cuyper, N., J. de Jong, H. De Witte, K. Isaksson, T. Rigotti and R. Schalk (2008) “Literature review of theory and research on the psychological impact of temporary employment: Towards a conceptual model,” International Journal of Management Reviews 10: 25-51.

De Jong, J., N. De Cuyper, H. De Witte, I. Silla and C. Bernhard-Oettel (2009) “Motives for accepting temporary employment: A typology of temporary workers,” International Journal of Manpower 30: 237-52

Department of Human Nutrition, University of Otago. (2014). Food Cost Survey. Retrieved 17 February 2015, from http://www.otago.ac.nz/humannutrition/research/food-cost-survey/otago057919.html

OECD (2014) – OECD Indicators of Employment Protection. Retrieved 17 February 2015, from http://www.oecd.org/els/emp/oecdindicatorsofemploymentprotection.htm

Walker, B. & Tipples, R. “Editorial: Introducing the Forum,” New Zealand Journal of Employment Relations 36(3): 1-4.

[1] Based on nine European countries – Austria, Greece, Hungary, Ireland, Italy, Poland, Portugal, Spain, and the UK.

[2] See OECD (2014).

[3] See Walker & Tipples (2011).

[4] See Department of Human Nutrition, University of Otago. (2014).

Categories: Work & wages
Gail Pacheco & Bill Cochrane
About the author

Gail Pacheco & Bill Cochrane

Auckland University of Technology & National Institute of Demographic and Economic Analysis

Gail Pacheco is an Associate Professor in the Economics Department, and Co-Director of the NZ Work Research Institute at the Auckland University of Technology. Her research interests focus on various labour market issues in New Zealand, and their impact on households and communities. In particular, investigating the impact of labour market policy (such as minimum wage regulation), and the potential influence of general social policy on labour market outcomes. Bill Cochrane was a Research Fellow in the Population Studies Centre from 2002-2010, and continues in the National Institute of Demographic and Economic Analysis as an Associate Researcher. He is involved in the provision of a wide range of consultancy services to local authorities, district health boards and various NGO’s in the areas of population projection and labour market analysis.