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More than a third of companies hire employees under fixed-term contracts

It is becoming more and more common for employers to hire workers under fixed-term contracts. This allows companies to save money and more easily adapt to the changing conditions of the market. Flexible employment regulations do not, however, foster growth in productivity or an adequate reallocation of resources on the labour market, the Deputy Head of HSE’s Laboratory for Labour Market Studies, Larisa Smirrnykh, posits

It is widely accepted that employment and labour laws in Russia are too rigid and formalized, and that employers are unable to flexibly regulate employment, which makes it difficult for them to raise workforce productivity, manage their business, and adequately react to external shocks.

As a result, the labour market has seen an increase in the number of fixed-term contracts, which allow companies to amend their staffing policies without losing money – that is, fire employees and replace them without warning or compensation when their contracts expire.

Fixed-term contracts are used not only in Russia, but in other countries as well. Companies can use them to save on costs and adapt to demand fluctuations. They can also employ fixed-term contracts to select employees for permanent positions, replace employees temporarily on leave, and create a buffer to protect permanent positions. In other words, fixed-term work contracts sometimes really do facilitate economic development, but in a number of situations they are simply a way of minimizing a company’s labour costs.

Larisa Smirrnykh presented her paper, ‘Fixed-term Employment Contracts, Job Creation and Employment: Findings from Russian Enterprises,’ at HSE’s Modern Management: Problems, Hypotheses, Research conference. In her presentation, Smirrnykh discussed how fixed-term contracts reflect on the functioning of the labour market.

With the heightened number of fixed-term employment contracts, there might be an increase in workforce job turnover, thereby improving the reallocation of resources on the labour market. This effect is caused by fixed-term contracts and can be conditionally considered a ‘step forward,’ since it sparks an increase in productivity. ‘But if the increase in fixed-term employment contracts is accompanied by heightened workforce turnover while job creation declines and existing vacancies are eliminated, then the impact of fixed-term contracts in this case can be conditionally called “running” in place,’ Smirrnykh emphasises.

Fixed-term contracts as a way to save

The analysis used data from the company survey ‘Interaction between Internal and External Labour Markets’ for 2009-2011. The survey covers around 2,000 large, medium, and small businesses from different regions and various sectors of the economy. Larisa Smirrnykh concluded that fixed-term work contracts are used by over 30% of all Russian companies, though they do not benefit the economy. Due to fixed-term work contracts, the working conditions of employees in certain categories are worsening, the rate at which jobs are created is falling, and companies’ restructuring processes are slowing down.

Companies that use fixed-term contracts carry out active staffing – they hire and fire employees more frequently and in larger amounts than other companies.

Among companies that used fixed-term work contracts in 2009-2011, the hiring rate was 17.3%, while the firing rate was around 16%. At the same time, companies that used exclusively open-ended employment contracts had a hiring level of 10.3% and a firing level of 10%, both notably lower. The research shows that as a result, a one-percent increase in the number of fixed-term work contracts raises the hiring level by nearly 2% and the firing level by 1.12%, leading to nearly a 3% increase in workforce turnover.

Activity running idle

With the rise in fixed-term work contracts on the Russian labour market comes an increase in not only workforce turnover, but also its ‘idle’ turnover. At the same time, this shows how much workforce movement is not connected with job movement, the author notes. Flexibility on the Russian labour market is increasing while there are a limited number of jobs that can be created and eliminated. According to the Smirrnykh’s calculations, a one-percent increase in the number of fixed-term employment contracts lowers job turnover by 1%.

In this way, the results of the research show that using fixed-term work contracts and increasing idle workforce turnover and workforce movement make the Russian labour market more flexible and dynamic. In addition, flexibility is achieved through fixed-term contracts as employment protection costs fall and working conditions of employees in certain categories worsen.

Additionally, the research shows that fixed-term work contracts restrain job creation and lead to a drop in job turnover, limiting the shift of jobs and labour resources from less productive enterprises to more productive ones. This hinders structural transformations from taking place in the economy.

It is still true that the research results do not make it possible to say for sure that companies’ use of fixed-term work contracts lowers the level of workforce productivity in the economy, Smirrnykh notes. ‘Losses in productivity from decreased job movement might be compensated by increased workforce productivity due to savings on unit costs, for example, resulting from fixed-term employment contracts,’ she posits.

 

December 09, 2014