Select Committee on Education and Employment Appendices to the Minutes of Evidence


APPENDIX 8

Memorandum from WS Siebert and Kirsten Daniel, University of Birmingham Business School

RECRUITING THE UNEMPLOYED—RESULTS FROM RESEARCH INTO THE HIRING OF PRODUCTION WORKERS[3]

  1.  To find ways of encouraging employers to hire unemployed people, it is important to understand the hiring process. In this submission, we report the results of a programme of research into the hiring of production workers (see Siebert, 1999). The research uses personnel records from a sample of multinationals with matched plants in the UK, the US and some continental European countries including Italy, the Netherlands and Belgium. The attached Appendix details our methods. While the sample is quite small—11 manufacturing plants over 20 years 1975-94—the results have the advantage of being based on what firms have actually done. The research complements studies based on countrywide data, and should therefore be of interest to the Committee.

  2.  Our research considers both company "hiring standards"—new recruits' age, previous experience, and education—and whether recruits' contracts are temporary or permanent. Hiring standards and contract status are measured from the recruits' personal records. (For the UK and US plants we also have data on whether the recruit was unemployed prior to recruitment, but have not analysed this aspect yet.) The lower are a company's hiring standards, the easier it is for the less qualified worker to obtain a job in the company. Put in another way—since most unemployed workers are drawn from the less qualified end of the spectrum—the lower are a company's hiring standards, the easier it is for unemployed workers to find a job in the company. And if the jobs are permanent, so much the better. Our research thus provides a framework within which to consider how Government can encourage employers to recruit unemployed people.

  3.  We here report briefly some broad results of the approach that are likely to be of relevance to the Committee. In the discussion, it is to be understood that many factors influence hiring standards, so it is necessary to think of each of these as being held constant while we conceptually vary one factor at a time.

  4.  To begin with, the unemployed worker is the classic "outsider". The "outsider" category comprises workers who have few formal skills, and hence tend to be difficult for the employer to assess, and so "risky" to employ. Moreover, the outsider—unlike the incumbent "inside" worker—has no ties to the firm in the form of firm-specific skills, or union protection, or employment protection legislation. The question is whether policies to reduce insider power via reduced union power or weaker employment protection will make the firm respond by being less choosy in recruitment, that is, by lowering hiring standards to the advantage of unemployed workers. Similarly, policies to educate unemployed workers and/or certify their skills may also make the firm respond by being less choosy in recruitment, again to the advantage of the unemployed. Let us take the issues of union power, employment protection, and education/training in turn.

  5.  First, union power. Our findings are that plant hiring standards tend to increase when national-level union membership increases, other things equal. The link is not always significant, admittedly, but it is consistent with the findings of Nickell and Layard (1997) based on countrywide aggregates (using a panel of OECD countries). Their results indicate that increased union power is associated with increased unemployment rates and longer unemployment duration, other things equal—in other words, union power has an adverse impact on recruitment of the unemployed. Importantly, however, they find that this association falls away if there is "co-ordinated" union-employer bargaining, since co-ordination moderates wage pressure (1997, 48). This co-ordination variable is absent from our study. In sum, data at plant and country level suggest that strong unions have adverse effects for recruitment of the unemployed—but responsible unionism might be able to control these effects.

  6.  For the UK, the new statutory union recognition procedure of the Employment Relations Act is likely to bring about a large increase in union membership. The increase could be of the order of 1 million workers, with recognition eventually won in about 1,000 extra firms (for discussion see Addison and Siebert, 1999). The simple policy implication is that this extra power does not augur well for unskilled recruitment. The Committee needs to think of ways to ensure the power is exercised responsibly.

  7.  Second, employment protection. Since employment protection legislation is many-dimensioned it is difficult to find a cardinal measure which enables us to say "how much" protection there is, or how much it has changed over time. Moreover, where employment protection is via case law rather than statute, as is the case in the US, it is easy to be misled into thinking that the US is less regulated than it is (see below). Our study uses two methods. The first is a simple on-off dummy to track changes in employment protection laws. For example, the 1985 change in the UK lengthening the period of service to claim unfair dismissal from one to two years is taken as a move from "on" to "off" (see Annex). A separate dummy tracks restrictions on temporary contracts. The second method is to compute the proportion of short-service workers (less than two year's service) in a plant's permanent workforce. The idea here is that the lower is the short-service proportion the more settled are incumbent workers, and the greater is insider power (Emerson, 1988, 780, first used this measure).

  8.  Our employment protection variables generally behave in the expected way. In particular, a movement from "off" to "on" in the employment protection dummy is associated with a two-year increase (about 15 per cent) in the previous experience required of new recruits, holding their education constant. Moreover, the smaller the short-service proportion (ie, the stronger are insiders) the greater is the proportion of workers hired on a temporary basis. The effect here is that a 10 per cent increase in the short-service proportion means a 2 per cent decrease in the proportion of new hires that are temporary. The effect suggests that when insiders are strong, employers are more cautious about recruiting on a permanent basis. Our findings, therefore, indicate that stricter employment protection is associated with increased hiring standards and fewer permanent jobs, which is clearly bad for the unemployed.

  9.  Returning to studies based on county-wide aggregates, that by Nickell and Layard (1997, 43) also finds a link between employment protection laws and heightened long-term unemployment "as firms become more cautious about hiring". They find no link with the total unemployment rate, however, presumably because employment protection laws also reduce firings and hence reduce flows into unemployment. Nevertheless, they cannot gainsay their result that the impact of stricter employment protection laws is to worsen long-term unemployment. In short, employment protection laws appear to concentrate unemployment, which is not what we want at all. Such a finding is confirmed in the recent OECD study (1999, Table 2.13), using a better employment protection law index (one which allows for changes over time). Furthermore, as regards youth unemployment specifically, results by Scarpetta (1996) also indicate that stricter employment protection laws are associated with higher youth unemployment.

  10.  Admittedly, as regards the temporary employment share, the OECD study (1999, Table 2.10) does not confirm our link with employment protection. On the other hand, for the U.S. Autor (1999) is able to demonstrate a significant link between increases in temporary worker hiring, and the onset of the doctrine of "implied contractual right to continued employment" in the States in which this occurred. Taken together, these results broadly confirm our finding that employment protection laws make the recruitment of the unemployed more difficult, and their jobs more precarious.

  11.  For the UK, there has been a trend in recent years towards stricter employment protection. In particular, the Employment Relations Act raises the ceiling for unfair dismissal compensation from £12,000 to £50,000, and also reverses the 1985 change in unfair dismissal eligibility—reducing the required period of service from two years to one. The implication is that recruitment of the unemployed will become more difficult—though how much more difficult is still an open question. After all, average compensation in the UK for unfair dismissal is currently only of the order of £3,000, compared to a figure 100 times larger (Autor, 1999, 7) in "unregulated" California. Evidently the UK still has some way to go. At the same time, as Figure 1 shows, in most study plants on both sides of the Atlantic the tendency to hire on a temporary basis is increasing, so something is happening. It seems, therefore, that the Committee has to take the employment protection obstacle seriously, and consider ways of overcoming it.

  12.  Third, education. It is clear that extra education would help unemployed workers, but—equally—that there are many difficulties. Such difficulties include the time taken for education policies to take effect, or, where short-term training programmes are contemplated, their low additionality. (Gardiner (1997, Table 5) cites an estimate of only 3 per cent of workers gaining a job as a result of the Training for Work programme.) Indeed, the Committee's call for evidence does not mention education policies. This might be a mistake, because our research indicates that recruits' education is important for employers.

  13.  The importance of education is shown by the trade-off between recruits' starting age or previous experience and their education. Other things equal, a recruit with a year's extra education (10 per cent more) has about two years less previous experience (15 per cent less). We would expect education and experience to be substitutes, but the size of the association comes as a surprise. Over the last two decades, recruits' education has in fact increased by about a year on average across our UK plants, so enabling many less experienced workers to have job opportunities from which they would previously have been ruled out. We are still analysing movements in the education variable, to see, in particular, what role the raising of the school-leaving age has played. In any case, our results underline the importance of extra education in the recruitment process, and the Committee may wish to consider methods of improving education opportunities for the unemployed.

  14.  In conclusion, we have provided results on three factors underlying the recruitment environment of unemployed people; union power, employment protection laws, and worker education. Using 20 years of data from plants in several countries we find these factors to be important in determining employers' willingness to hire unqualified workers, and by extension, unemployed workers. According to our results, limiting trade union power and employment protection, and improving worker education would provide the best foundation for the recruitment of unemployed people. Of course, such a course of action might have disbenefits for employed workers, and in any case would run counter to Government policy. Nevertheless, the Committee could lend its support to the voice of caution with regard to further extension of collective power, or employment protection (eg, via the proposed directives for informing and consulting employees, and for regulating employment agencies). Research into methods of improving the education qualifications of unemployed workers would also be fruitful.

W S Siebert and Kirsten Daniel

University of Birmingham Business School

March 2000

REFERENCES

  Addison John and W S Siebert, 1999, "Labour Market Reform in the United Kingdom: From Thatcher to Blair", unpublished paper, Birmingham: Birmingham University Department of Commerce.

  Autor David, 1999. "Outsourcing at Will: Unjust Dismissal Doctrine and the Growth of Temporary Help Employment", unpublished paper, Harvard: Harvard University Department of Economics.

  Emerson Michael, 1998 "Regulation or Deregulation of the Labour Market", European Economic Review, 32: 775-817.

  Gardiner Karen, 1997. Bridges from Benefit to Work: A Review, York: Joseph Rowntree Foundation.

  Nickell Stephen and Richard Layard, 1997. "Labour Market Institutions and Economic Performance", Discussion Paper Series on the Labour Market Consequences of Technical and Structural Change No 23, London: Centre for Economic Performance, London School of Economics.

  OECD, 1999. Employment Outlook 1999, Paris: Organisation for Economic Co-operation and Development.

  Scarpetta Stephano, 1996. "Assessing the Role of Labour Market Policies and Institutional Settings on Unemployment: A Cross-Country Study", OECD Economic Studies, 26: 53-113.

  Siebert W S, 1999. Company Recruitment Policies: Implications for Unskilled Workers, York: Joseph Rowntree Foundation.


3   We are grateful to the Joseph Rowntree Foundation for financial support for the research and to the members of the Foundation's Advisory Group including Gerry Makepeace, Pamela Meadows, Paul Teasdale, Derek Williams, and Stephen Wood for their advice. However, we are solely responsible for interpretation of the results. Back


 
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