Over past decades, a number of Member States have registered a large rise in temporary or fixed-term employment. This was mainly the result of reforms of employment protection legislation introducing flexibility ‘at the margin’ i.e. substantially deregulating the use of temporary contracts while maintaining stringent firing rules on permanent contracts. As regards the size or magnitude of reforms, marginal as opposed to
discrete(1) ones prevailed. Although being relatively small in size, they were paramount in increasing labour market flexibility.
High and persistent unemployment rates during the 1980s and 1990s in several (continental) EU Member States were often blamed on excessively stringent firing legislation, leading to widespread calls from both academics and international organisations for greater labour market flexibility. However, as openended contracts represented the normal form of employment, political economy considerations prevented governments from loosening regulations, leaving them with the alternative option of largely liberalising the use of temporary contracts, which had been previously confined largely to seasonal jobs or other genuinely temporary tasks.
Following such reforms, temporary contracts were increasingly used by firms as a hiring tool, often resulting in an initial rise in overall employment levels. However, concerns over a number of ‘perverse’ effects of largescale use of temporary contracts have rapidly emerged, essentially associated to the emergence of dual (or segmented) labour markets: one for permanent employees (or ‘insiders’), who can look forward to a life of continuous employment and careers offering promotion and rising incomes, and another for temporary employees (or ‘outsiders’), living in a precarious situation and at risk of frequent spells of unemployment with poor prospects of career advancement.
Labour market segmentation affects predominately young and low-skilled workers, particularly during economic downturns. The high incidence of temporary work for these two groups can put them in a relatively precarious situation, not only in terms of employment security, but also in terms of income security, because of the limited access of temporary workers to social security benefits in general, and unemployment insurance in particular.
Whereas the liberalisation of temporary contracts had boosted hiring and job creation, most of those contracts were not transformed, at the contracts’ expiry, into open-ended ones, leading to reduced transition rates from temporary to permanent employment. Hence, many observers highlight that in segmented labour markets, temporary work is often used by firms as a cheaper means of production, taking advantage of the large regulatory gap to permanent contracts, rather than as a tool for ‘screening’ the productivity/adequacy of new recruits.
This is reflected in lower wages and training provision for temporary workers than for permanent workers regardless of similarities in their characteristics and job tasks. Moreover, the use of temporary contracts affects a disproportionate amount of young workers, as temporary jobs are increasingly used as a ‘port of entry’ into the labour market for young people who have finished their initial education. Labour market duality can be a particularly serious problem for young people, as a precarious start in the world of work is likely to have a long-lasting negative impact on future employment and earnings prospects.
The recent recession has highlighted other major shortcomings of labour market duality as temporary workers in general, and the young in particular, have been particularly hard hit in a number of Member States (e.g. Spain, France). They have borne the brunt of the reduction in employment, essentially as a counter-part to the expansion of temporary work in those countries during previous years as a result of ‘partial’ or ‘two-tier’ reforms of EPL. Overall, large-scale use of temporary contracts within segmented labour markets seems to increase the cyclical volatility of employment, while the initial rise in employment levels as a result of two-tier EPL reforms gradually withers away, particularly during economic downturns.
Concerns over adverse effects of labour market segmentation are not new. The EU has already responded in 2006-2007 by putting forward the flexicurity approach as the right policy “recipe”, inter alia, to counteract segmentation(2). A flexicurity reform strategy aims to correct situations characterised by unbalanced distribution of flexibility needs across different groups of workers leading to an undesirable reduction in the labour market security of some of them.
However, the disproportionate impact of the “great recession” on temporary (and young) workers makes it more urgent to take a fresh look at the type and size of ‘perverse’ effects related to labour market segmentation, with a specific focus on the young. This can be done firstly, by looking at the existing literature, both theoretical and empirical, on the implications of labour market duality for a number of key labour market variables, such as employment, wages, labour market transitions and human capital accumulation (with a particular emphasis on recent academic research related to two-tier reforms of employment protection legislation, EPL), and secondly, by gathering new descriptive and econometric evidence on such implications using several EU statistical sources, including micro data. This is what this chapter attempts to do.
This chapter is divided into eight further sections, as follows:
(1) | I.e. representing large changes in regulations. |
(2) | As identified in the Commission’s Communication “Towards Common Principles of Flexicurity: More and better jobs through flexibility and security”, COM(2007) 359 of 27.6.2007. |
(3) | Not in Employment, Education or Training. |
(4) | As identified in the Commission Communication “Towards Common Principles of Flexicurity: More and better jobs through flexibility and security”, COM(2007) 359 of 27.6.2007. |