Fixed-Term Workers Deserve Wage Premiums in Compensation for Job Insecurity

TSURU Kotaro
Senior Fellow, RIETI

From this autumn through the end of the year, policy discussions on "non-regular workers" will enter a crucial stage. In August, a subcommittee on working conditions of the Labour Policy Council, an advisory body to the Ministry of Health, Labour and Welfare (MHLW), released an interim report on fixed-term contracts. Then, in September, a study group on future measures for part-time workers, another advisory to the ministry, issued its report. Based on these two sets of policy recommendations, the ministry is to draw up a Vision for the Treatment of Non-regular Workers (tentative) by the end of this year to define a policy direction that will ensure the fair treatment of non-regular workers.

In this article, I would like to discuss the direction of the reformation of rules and regulations surrounding non-regular workers, drawing upon Non-regular Employment System Reform in Japan: Changing the way people work, a book which I co-authored and co-edited with my fellow researchers, as well as on findings from our more recent analysis. The book, published by Nippon Hyoronsha Co., Ltd., is an outcome of a research project of the Research Institute of Economy, Trade and Industry (RIETI).

♦  ♦  ♦

The way in which non-regular workers work is characterized by three parameters: 1) work hours (full time → part time); 2) work contract period (indefinite term → fixed term); and 3) employment relationship (direct employment → temporary hire from a staffing agency). In other words, work conditions for non-regular workers can be defined in a three-dimensional space where the origin represents "regular workers," i.e., directly-employed full-time employees with permanent status. The most important of the three axes constituting the three-dimensional space is the work contract period. Although there are many people who willingly choose to work as a part-timer or as a temp worker, only few, if any, would do so on a fixed-term contract. Being on a fixed-term contract is the root cause of job insecurity and has been often used as an excuse for treatment different from that of permanent employees.

Discussion to date has tended to consider policy responses separately for each of the three different types of non-regular workers, namely, part-timers, agency workers, and fixed-term contract workers (primarily those directly employed full time). Such an approach would not work since it would be like attempting to squeeze a three dimensional space into a one dimensional space. We must take a different approach and focus on fixed-term status, a cross-cutting issue for all non-regular workers regardless of their work styles, i.e., whether they are part-timers or agency workers.

However, judging from the interim report of the MHLW's advisory subcommittee, there has been little progress in policy discussion on the fixed-term status of non-regular workers as management and labor remain divided. One reason for the stagnant progress lies in those on the labor side insisting on the principle of indefinite employment as a norm and thus urging the government to regulate fixed-term contracts both at entry and exit. In Japan, a country where the hiring of fixed-term workers has been an extensive practice, the introduction of such regulations on fixed-term contracts would have significant side effects. Moreover, judging from the experiences of other countries, it is doubtful whether such regulations will actually facilitate the transition from non-regular to regular worker status or lead to greater job security.

At the time of making significant amendments to the law governing temporary agency workers, management and labor continued to bicker over similar regulations, i.e., those that would amount to quantitative control, and ended up with halfway measures. We must avoid making the same mistake. The discussion should be focused on finding ways to improve the treatment of non-regular workers and considering realistic policy options.

Employers are concerned with good reason: an improvement in the treatment of non-regular workers means increased costs for them. What is important is to create a mechanism for ensuring that improved treatment will lead to greater motivation in the workers and greater productivity.

♦  ♦  ♦

How should we consider differences—particularly wage disparities—in the treatment between regular and non-regular workers? First, provided that all other working conditions and qualifications are equal, fixed-term contract workers should be paid wage premiums to compensate for the risk of job insecurity as compared to permanent workers.

In the fifth round of the Survey on Life and Job Search Activities of Temporary Workers, an Internet survey conducted by RIETI (for a joint study with Fumio Otake of Osaka University, Hiroko Okudaira of Okayama University, and Koichi Kume of Nagoya University of Commerce and Business), we asked respondents hypothetical questions. As a result, we found that those who would ask for compensation for shortening the contract period from three years to one year demanded an average increase of 20% in wages. Day workers and part-timers/casual workers hired on short-term contracts asked for a relatively low rate of compensation, whereas workers hired on direct contracts demanded a higher rate.

Meanwhile, our regression analysis found that those non-regular workers who are highly educated but have been unable to obtain a permanent job and those who wish to become regular workers tend to ask for a higher rate of compensation for increased insecurity. From this, we can see that non-regular workers' demand for compensation is stronger when they have more similarities with their regular counterparts in the type of work performed.

In fact, the need to compensate for job insecurity is one of the few points on which members representing management and labor reached general agreement in the interim report of the MHLW's advisory subcommittee. It is definitely necessary to create a compensation mechanism in which non-regular workers would be paid a designated percentage of their wages at the end of their contracts, which is important as a way to raise the level of happiness for involuntary non-regular workers or the most discontented among non-regular workers.

At the same time, however, we should not consider all wage differences between regular and non-regular workers as problems. In certain circumstances, wage differences between regular and non-regular workers can be reasonably explained even when they are engaged in the same job. For instance, in the case where certain fixed employment costs—such as those for recruiting, training, and welfare benefits—are involved, hourly wage rates proposed to part-timers would be lower than those proposed to their full-time counterparts because of shorter work hours. Also, from the viewpoint of the workers, it would not be strange to have a reservation wage rate, or the minimum wage at which an individual accepts employment. In the case of temporary agency workers, the reservation wage rate would be lower as they can save on the cost of finding a job on their own.

The essential difference between regular and non-regular workers is that the scope and nature of future work are not defined for regular workers. In other words, regular workers are employed on the assumption that they would accept any sudden request from their employer, for instance, overtime work or a transfer to a different location or section within the company. It is quite natural for companies to offer higher wage rates for regular workers than those for non-regular workers engaged in the same kind of work to compensate for implicit future work.

The survey asked respondents whether they would accept an additional work rule under which they cannot reject a transfer to another location or section even if it is against their will. Those who would accept this in exchange for a compensatory pay increase asked for an average wage hike of 26% , with all other conditions being equal. Meanwhile, those who found the additional rule unacceptable even in exchange for a 50% wage increase accounted for roughly half of all respondents, and the proportion of such respondents was particularly high among part-timers and casual workers (see table).

Table: Proportion of workers who do not wish to be transferred to another location or section within the company even if they are offered a 50% wage increaseTable: Proportion of workers who do not wish to be transferred to another location or section within the company even if they are offered a 50% wage increase
Considering the fact that, in certain cases, wage disparities between regular and non-regular worker engaged in the same kind of work are objectively explainable as shown above, it is quite impracticable and unreasonable to define strictly those who are non-regular workers in form but almost equivalent to their regular counterparts in substance (same tasks, same career, and permanent employment) and mandate employers to give such workers equal treatment (same wage rates) with their regular counterparts as provided for in Article 8 of the Act on Improvement, etc. of Employment Management for Part-Time Workers.

Indeed, the aforementioned report by the MHLW study group points out that those fulfilling all of the three conditions (same tasks, same career, and permanent employment) accounts for only 0.1% of part-time workers and that there may be cases where companies draw a clear line between tasks assigned to part-timers and those to full-time regular workers for the sake of avoiding infringing the non-discrimination provisions of Article 8.

The European Union has a directive requiring the equal treatment for part-time workers and fixed-term workers. However, as pointed out by Yuichiro Mizumachi of the University of Tokyo, the reality is that different treatment is permitted where there are objective and reasonable grounds such as differences in the number of years of service and educational backgrounds, with the non-discrimination provisions effectively interpreted as the "principle of prohibition of unfair treatment without reasonable grounds."

♦  ♦  ♦

Rather than seeking equal treatment, which aims to implement the principle of same pay for the same work, as a rock-ribbed law, we should strive to realize equitable treatment—i.e., balanced treatment of workers according to their respectively different preconditions—by legislating the principle of "prohibition of unfair treatment without reasonable grounds."

Some people may point to the ambiguity as to what constitute "reasonable grounds." However, it is necessary to leave room for flexibility to make judgments on a case-by-case basis through dialogue between management and labor. What is important is to create a mechanism under which companies cannot escape penalty if their practice deviates significantly from that of equitable treatment. The implementation of such a mechanism will have a considerable deterring effect on malicious discrimination.

It would also allow for differentiated treatment according to the number of years of service. Subsequently, it would be important to utilize it aggressively to improve the treatment of non-regular workers. The idea is to ensure equitable treatment by means of treating non-regular workers in a manner proportionate to the number of years of service (by seniority).

Our regression analysis using data collected in the questionnaire survey confirmed the positive correlation between the length of service or contract period and the wage level for non-regular workers (whether per hour or per month), which holds true even when taking into account such factors as gender, age, and educational background. Therefore, it will be quite possible that a longer service or contract period will lead to an improvement in the treatment of non-regular workers.

However, when we analyze only for part-timers and casual workers, we cannot find the same correlation. Compared to temporary agency workers, part-timers tend to work a longer period of time, and more than 30 percent of them have been in service for longer than 10 years. Yet, they are not given sufficient appreciation for their long-term contribution. Treatment according to the length of service period is particularly important in improving the treatment of part-timers.

>> Original text in Japanese

* Translated by RIETI.

September 29, 2011 Nihon Keizai Shimbun

October 31, 2011