Labor market duality refers to the coexistence of temporary workers with low dismissal costs and permanent workers with high dismissal costs within the same firms. The prevalence of temporary employment is a common feature in several countries, such as Continental European countries. Further, since the 1980s, the Japanese labor market has been experiencing a substantial increase in temporary jobs. The quality of temporary jobs tends to be lower than that of permanent jobs (e.g., the former includes lesser job security, lower wages, and fewer training opportunities compared to the latter). For this reason, the causes and consequences of widespread temporary employment have both policy and academic implications. To date, most of the research on this topic has focused on the supply side of labor markets (demographic changes in workforce), macroeconomic impacts (business cycles), and labor-market institutions. However, since the majority of temporary workers tends to be involuntary, the demand-side analysis is important, as well. It has rarely been examined how market competition would affect firms’ demand for temporary and permanent labor, particularly within the context of economic globalization.

Our study attempts to fill this gap. By proposing a heterogeneous-firm trade model with a dual labor market, we examine the relations between the demand for temporary and permanent workers and economic globalization. Our model highlights intensified product market competition as a driving force behind the shift in demand from permanent to temporary workers. In addition, our model demonstrates that international outsourcing effectively reduces labor adjustment costs, which decreases the demand for permanent workers. Using industry-level data from the Japanese manufacturing sector, we empirically test the relations between the demand for temporary and permanent workers and economic globalization and find that they support most of our theoretical predictions.

 

Hitoshi Sato joins the Walter H. Shorenstein Asia-Pacific Research Center (Shorenstein APARC) during the 2018–2019 academic year from the Institute of Developing Economies (IDE-JETRO), a national research institute in Japan, where he currently serves as a senior chief research fellow. Sato’s field of study is international trade, and his current research interests include the relationships between internationalization of firms and labor markets. His research efforts have been published in journals, books, and policy reports, including the Journal of Japanese and International Economies. Further, Sato has been appointed as a consulting fellow by the Research Institute of Economy, Trade and Industry since 2013. He received his PhD in economics from the University of Wisconsin–Madison in 2006.