Employment Adjustments on the Internal and External Labour Market – An Empirical Study with Personnel Records of a German Company

Firms are affected by the product demand. This leads to employment adjustments. On the internal labour market there exist two prominent possibilities, changes of working hours, especially overtime, and modifications of promotion measures. On the external labour market the number of employees can be adjusted. In the literature we find only very few contributions investigating the issue whether internal adjustments are linked and which relationships exist with external adjustments. Are they of a complementary or substitutive nature? Furthermore it is of interest to find out, whether we can observe an obvious trend and whether the adjustments are driven by cyclical movements. For this study we have an extensive data set of a large German manufacturing company, which supplies innovative products for the domestic and international market, provided on a monthly base from January 1999 to December 2005. Although this type of data allows only restricted generalisations of the results, the available information has several advantages compared with other data sets: (1) The data are very reliable because they are directly extracted from the human resources management of the company; (2) there do not exist problems with unobserved heterogeneity due to firms, branch or regional characteristics; (3) they allow to distinguish between several types of external employment adjustment and we can use information on monetary incentive instruments; (4) monthly, not only yearly data are provided. The empirical analysis starts with descriptive statistics. We find that the employment adjustment cycle coincides only to a certain degree with the macroeconomic cycle. Internal and external adjustments are more characterized by complementarity than by substitution. Over the observed period we cannot detect analogous wage adjustments. It is noticeable that in 2003 compared with the years before the number of employees is substantially reduced. The econometric investigation is based on a two-stage approach. We start with a bivariate probit estimation in order to extract the relationship between the probability of overtime and of promotion. Unobserved variables have opposite effects on the former and the latter adjustment instrument. Furthermore, we detect a negative trend of internal employment adjustments. Cyclical effects are ambiguous. The next step, the determination of external adjustments with respect to overtime and promotion adjustments, is split into two estimates. On the one hand we do not distinguish between the type of external employment adjustment and on the other hand we use this information separating between quits, layoffs, workers with a cancellation agreement and with a transition into a transfer organisation. The first appoach demonstrates that a promotion reduces the probability to leave the firm while overtime is positively associated with an external job change. This pattern holds generally speaking in the second, more detailed estimates. Quits are the exception. In this case we observe opposite effects. Finally, we cannot detect any influences of promotions on cancellation agreements.

Gerlach, Knut and Olaf Hübler (2008), Employment Adjustments on the Internal and External Labour Market – An Empirical Study with Personnel Records of a German Company, ZEW Discussion Paper No. 08-133, Mannheim.