Flexibility versus Performance: The Determinants of Labor Contracts in Nairobi, Kenya
with Inbar Amit, Alison Andrew, Rob Garlick, Kate Orkin, and Carol Nekesa
Current Version
Employment in developing countries is often short and disrupted, generating costly search and limiting the potential for workers to accumulate firm-specific human capital. We study the incentives guiding firms' use of short-term relative to long-term contracts in Nairobi, Kenya, using novel survey data on firms’ hiring and contracting practices, and hypothetical vignettes measuring their beliefs and preferences. Our key finding is that the use of short-term labor is governed by a trade-off between managing demand variation versus minimizing adjustment costs and incentivizing worker performance. We first document that firms face considerable variation in demand for goods and services across time, much of which they pass on to workers through short-term contracts; higher demand variation is associated with a greater use of short-term labor. Second, we show that bringing on short-term workers involves adjustment costs: it takes time searching for, hiring, and on-boarding workers, potentially offsetting the gains from flexibility. We show both that median adjustment costs are low, making short-term contracts feasible for many hires, but that hires with greater adjustment costs are more likely to be on long-term contracts. Finally, we show that firms believe contract type incentivizes worker performance: the same worker is expected to perform better when hired on a long-term basis. We incorporate these features---variation in demand, on-boarding costs, and incentives---into a model of firm hiring, through which to interpret contract choice and turnover in low-income countries.