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The impact of precarious work on wages, productivity and economic growth

Posted on August 06, 2015 by Daragh McCarthy

Temp Wanted
The economic impact of precarious work blog

Temporary, short-term forms of employment in the early stages of an economic recovery are a well-established feature of the labour market; however, recent research by the OECD  has raised the concern that this practice has become a more deeply ingrained, lasting characteristic in the world of work. The issue of precarious jobs and the impact this form of employment has on households and the wider economy is gathering an increasing amount of attention from policymakers, academics, civil society groups and media across Europe*.

Research by the ESRI shows that in terms of employment loss young workers and migrants suffered disproportionately during the recession. The data from the OECD suggest the same groups are most likely to end up in non-regular forms of employment characterised by short-term contracts, insecure hours and the absence of pension and sick leave benefits.

There is a school of thought that the recent recession exacerbated a longer standing divide in the labour market . Technological development is driving much of the innovation in the economy and benefiting high-skilled workers, but hollowing out traditional middle-class jobs—while driving down terms and conditions at the lower end of the labour market. In this view, the sharp downturn in the business environment and labour market policies yet to adapt to this new work environment have served to strengthen a structural divide that began in economies in Europe prior to the financial crash in 2007. In the Republic, high levels of employment and wages in construction masked this general trend prior to the collapse in activity in the sector.

Amongst the many issues raised by a move to more flexible forms of work, two findings from the OECD research stand out:

  1. Precarious work is associated with a wage penalty
  2. Businesses are less likely to invest in improving the skills of workers employed under non-regular forms of employment.

The finding of a wage penalty for full-time non-regular employees relative to peers on permanent contracts runs contrary to the idea that workers are rewarded for greater flexibility through a wage premium. When combined with evidence that temporary forms of employment are more likely to be a trap than a stepping stone to a permanent contract, the wage penalty has negative implications for the potential lifetime earnings for workers in this form of employment. The propensity of businesses to invest less in workers on these types of contracts raises concern over the potential for future productivity growth, which heavily influences the capacity of the economy to expand and drive sustainable increases in living standards.

Much remains unknown about the cause, extent and impact of this apparent shift in the labour market. A recent NERI working paper, Earnings and Low Pay in the Republic of Ireland , explores some of these issues, while examining the distribution of earnings among employees and self-employed workers. Working from OECD data, slides from a recent presentation at UNITE’s conference Strategies to End Precariousness: The Case for Decent Work provide a profile of workers in insecure forms of work, while drawing attention to some potential solutions to the negative impacts associated with this form of employment.

The relationship between insecure work, wages and productivity has become an increasingly prominent political issue in the U.S. and a number of European countries including  the UK, Spain, Greece, and the Republic of Ireland. The outcome of this debate will influence the level of income inequality in society, living standards for workers and their families, and the potential rate of economic growth in the years to come.

The Economic Impact of Precarious Work from NevinEconomicResearchInstitute

A pdf version of the slides from the presentation is available here .

*See, for example, a recent series of articles on the Irish Times and the Financial Times on precarious jobs. 

Posted in: InequalityJobsMacroeconomicsWages

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