Flexible contracts and human capital investments
2011– In 2010, ten percent of the Dutch workers had a flexible contract which enables firms to adjust employment to a fast changing environment. The recent economic crisis clearly showed how firms directly disposed their workforce with temporary contracts. At the same time, the continuous shifts in skills demanded in the labor market also require that workers participate in training courses that update their skills. When workers with temporary contracts play a major role in the adjustment process in the labor market, particularly these workers should be able to adjust their skills to the shifts in the skill demands. This paper investigates the extent to which the participation in training among flex workers is similar to that of workers with permanent contracts, and to what extent differences in training participation are associated with differences in mobility in the internal or external labor market. While most studies in the field compare temporary workers to permanent workers, this research enables to distinguish four different contract arrangements: permanent, – temporary,- temporary work agency,- and on–call contracts. Moreover, this study enables to distinguish employer–funded training and self–funded training, whereas most studies only focus on employer–funded training. This enables the researchers to analyze whether flex workers could compensate a lack of employer–funded training by their own investments in training. Finally, the researchers were able to distinguish general training which increases a worker’s opportunities for another job, and firm–specific training which focuses on the skills needs in the current job.
Although the decreased differences in training participation in recent years, the estimation results presented in this article confirm the hypothesis from human capital theory that workers with a flexible labor contract participate less often in training than those with a permanent contract. This holds for all types of flex workers, although there are considerable differences between the various types of flexible work arrangements. The lower training participation of flex workers is merely due to the fact that these workers get less employer–funded training. Workers with a flexible contract partly compensate this lack of employer–funded training by their own training investments, which explains why their training does not focus on the firm–specific skills they need for their current job but, rather, on the general skills needed for finding another job. This being said, conditional on the fact that they do receive employed–funded training, flex workers are more likely than permanent workers to receive general than firm–specific training.
Furthermore, the study analyzes to what extent training participation is related to flexible workers labour market mobility. The results show that for temporary workers, participation in employer–funded firm–specific training is related to improved opportunities for a transition to a permanent contract with their employer. This is consistent with the view that firms use training in the selection process for their permanent staff. However, participation in self–paid training is not related to finding a better job. The lower training participation of flex workers is likely to impede workers’ adaptability to changing skill demands in the labor market. This suggests that there is indeed a trade–off between labour market flexibility and training participation. However, this does not hold for workers with flexible contracts whose participation in employer–funded firm–specific training helps them in making a transition towards a permanent contract with the firm. However, flex workers who do not participate in any employer–funded training cannot adequately compensate this by investing in their own skills. This suggests that the market fails in the skills provision of flexible workers which is required for giving these workers a more sustainable position in the labour market.
From a policy perspective, this research therefore concludes that if governments want to encourage labour market flexibility, they should be aware of the fact that flexible employment contracts impede employee’s human capital investments. This could hamper workers possibilities to adapt to new skills needs. Increased labour market flexibility therefore needs to be supplemented by additional public facilities or labour legislation to stimulate employers to invest in training which enables flex workers to keep their skills up to date.
Reference: Fouarge, D., Grip, A. de, Smits, W., Vries, R. de (2011) Flexible contracts and human capital investments. Maastricht: Research center for Education and Labour market School of Business and Economics. (The full article is adjusted in PDF).
Themes: Flexible organization, talent development
Source Type: Articles
Sector Classification: Not specific