There is a rich literature, largely based on the Spanish experience (e.g. Dolado et al., 2002; Bentolila et al., 2008), which looks at the effects of the extensive use of temporary work on labour market outcomes, such as employment, unemployment, wages and labour flows.
This literature suggests that two-tier EPL reforms lead to a more frequent use of temporary contracts as an entry mode into employment. As a result, a number of EU Member States have registered a sharp increase in the share of employees in temporary work in past decades (Bentolila et al., 2008; Boeri, 2010a). Chart 6 shows that Member States that introduced large two-tier EPL reforms have seen a trend increase in temporary employment as a share of total number of employees since the mid-1980s. Spain registered the most rapid growth in the incidence of temporary jobs, rising from 11% of total employment in 1983 to approximately 35% in 1995 (Guell and Petrongolo, 2003). Conversely, Chart 7 indicates that, in Member States characterised by relatively less stringent regulations for permanent contracts, i.e. UK, Denmark and Ireland, there has been no trend increase in the incidence of temporary employment.
The positive correlation between two-tier EPL reforms and the share of employees in temporary work is illustrated in Chart 8 and Chart 9. Following the OECD (2004), Chart 8 identifies the magnitude of segmentation in EPL regimes, calculating the relative gap between the EPL indicators for permanent vs. temporary contracts. Changes in the EPL gap are correlated with changes in the share of employees in temporary employment. Estimates cover a large number of EU Member States for two age groups: young workers (15-39) and all workers (15-64).
Following Boeri (2010b), Chart 9 shows that in 2008, strict EPL for permanent contracts tended to be associated with a higher share of temporary employment across EU Member States. This suggests that firms are effectively being encouraged to use temporary contracts as a way to circumvent rigid dismissal rules on permanent contracts, with a stronger effect on workers in the 15-39 age group.