How Do Firms Attain Internal and External Flexibility of Employment?

Firms increasingly rely on workers with nonstandard contracts, but the underlying economic factors that distinguish workers on standard contracts from those on nonstandard contracts is poorly understood. We study their asymmetric employment and wage adjustments to examine whether the differences in the importance of firm-worker relation specificity between the two types of workers is a fundamental source of heterogeneity. Leveraging the exogenous shock that stems from exchange rate fluctuation and heterogeneous trade exposure between firms, we find that firms absorb temporary shocks by adjusting the number of dispatched workers from temporary help agencies and adjusting bonuses of in-house workers instead of reducing the number of in-house workers employed.