Interlocking complementarities between job design and labour contracts

The drivers of large within-industry heterogeneity in the use of non-standard employment are still poorly understood. Specifically, there is little evidence on how firm-specific factors related to the organization of work affect the diversity of hiring decisions. This paper contributes to this line of research by studying the existence of interlocking complementarities between job design and labour contract at the firm level. Using a formal model, we show that firms face two organizational equilibria: one in which job designs with high routine task intensity are matched with a large use of non-standard contracts; and the other in which low routine task intensity combines with a small use of non-standard contracts. These complementarities exist because while non-standard contracts allow firm to adjust to external shocks, they also provide little incentive to invest in firm-specific knowledge. Since the cost associated with the lack of such knowledge is lower (higher) in firms with high (low) routine task intensity, they are also more (less) likely to use this type of contracts. We test the predictions of our model using linked-employer-employee data from the Emilia-Romagna region. We build an index of firm's routine task intensity by matching information from INAPP data at the occupation level. The empirical evidence is consistent with our theory: the use of non-standard contracts is positively associated with routine task intensity at the firm level. This result holds controlling for a wide range of firm-specific and contextual covariates and it is robust to alternative estimation methods (OLS, panel and IV). The related managerial and policy implications are discussed.