The Impact of Demand Shock on the Employment of Temporary Agency Workers: Evidence from Japan during the Global Financial Crisis

Abstract

This study investigates the effect of a negative demand shock on the composition of worker types at firms and examines the change in the share of temporary agency workers. The 2007-2009 global financial crisis is used as the natural experiment to clearly identify the causal link between the demand encountered by a firm and the composition of its workforce in terms of worker types, as well as to rule out any reverse causation. The decrease in demand experienced by Japanese exporting firms is adopted as the exogenous demand shock. Results indicate that compared with other firms, those with higher export ratio, lower liquid asset ratio, higher share of temporary agency workers, larger increase in the share of temporary agency worker ratio, and lower volatility in their sales prior to the crisis decreased their share of temporary agency workers in response to the demand shock. The quantitative effects of these pre-crisis firm characteristics are all economically significant. These results suggest that temporary agency workers serve as a buffer to demand shocks, and liquid assets work as a substitute for temporary agency workers.