• Foreword
• Table of contents
• Executive summary
• Chapter 1: EU labour markets in time of economic crisis
  • 1.Introduction
  • 2.Economic and labour market developments during the crisis
  • 3.Which population subgroups have been most affected?
  • 4.Outlook
  • 5.Longer term trends and panorama of annual indicators for EU labour markets in 2009
  • 6.Summary and conclusions
• Chapter 2: On the path to recovery:
  a review of labour market measures
  • 1.Introduction
  • 2.A framework for analysis
  • 3.Mai ntai ning employment, creating jobs and promoting mobility
  • 4.Upgrading of skills and labour market matching
  • 5.Increasing access to employment and supporting household income
  • 6.Assessment of the crisis-related measures
  • 7.Employment policy actions beyond 2010
  • 8.Conclusions
  • References
  • Annex 1
  • Annex 2
• Chapter 3: Youth and Segmentation in EU labour markets
  • 1.Introduction
  • 2.Young people in the labour market
  • 3.Temporary contracts and dual
    labour markets
    • 3.1.Two-tier reforms of employment protection legislation
    • 3.2.Two-tier EPL and the growth of temporary work
  • 4.Segmentation and youth
    • 4.1.Incidence of temporary work for young workers
    • 4.2.Temporary contracts and hiring
  • 5. School-to-work transitions
    and youth Not in Employmen,
    Education or Training
    • 5.1.Youth employment rates after leaving initial education
    • 5.2.Youth Not in Education, Employment or Training (NEET)
    • 5.3.Does youth unemployment produce blemishes or lasting scars?
  • 6.Segmentation, wages and
    human capital formation
    • 6.1.Segmentation and wages
    • 6.2.Segmentation, on-the-job training and further education
  • 7.Segmentation and labour market
    transitions
    • 7.1.Segmentation increases job separations
    • 7.2.Segmentation, labour flows and long-term unemployment
    • 7.3.Segmentation and transitions from temporary to permanent employment
    • 7.4.Determinants of labour market and pay transitions
  • 8.Temporary contracts and
    employment volatility
    • 8.1.The 'honeymoon effect' of two–tier reforms
    • 8.2.Business cycle volatility, youth and temporary employment
  • 9.Conclusions and policy
    recommendations
  • References
• Statistical annex
  • 1.Data sources definitions
  • 2.Macro economic indicators
  • 3.Key employment indicators
• List of acronyms

Chapter 3 : Youth and Segmentation in EU labour markets

Temporary contracts and dual labour markets3. 3.1. Two-tier reforms of employment protection legislation

Temporary contracts can play an important role in the transition process between education and the world of work, i.e. by facilitating entry into the labour market, particularly in those countries where apprenticeship/traineeship systems are underdeveloped. Temporary contracts can facilitate worker selection and a better matching of job requirements to workers’ needs/aspirations, particularly when they also provide training opportunities that serve as bridges or stepping stones into more permanent and/or better paid jobs. However, in recent decades, labour markets in several EU Member States have been characterised by increasing dualism or segmentation. These terms refer, essentially, to the coexistence of workers with stable (i.e. long-term) employment relationships and other workers with temporary employment contracts, including agency work as well as seasonal or casual jobs. The latter group may become ‘trapped’ in temporary and/or precarious jobs with long-lasting adverse consequences on their labour market attachment, earnings, career prospects, job satisfaction and overall happiness (Layard, 2005).

Some authors (e.g. Boeri, 2010b) argue that labour market dualism is related to a particular reform strategy with respect to Employment Protection Legislation (EPL). EU Member States⁽¹⁰⁾ have enacted numerous reforms in this area since the 1980s aimed at improving the functioning of labour markets in general and reducing high and persistent structural unemployment rates. The EPL reform strategies that have been primarily responsible for the increase in dualism appear to be those that focused on promoting flexibility ‘at the margin’ – through the deregulation of temporary contracts and/or the introduction or development of agency work and other contracts of limited duration⁽¹¹⁾ – while keeping existing rules on permanent contracts largely unchanged.

These strategies are generally considered to have been largely determined by political considerations, in other words by what it was possible to achieve through the political process, rather than by considerations of how best to design the EPL institution in order to improve the workings of the labour market and allocative efficiency in general. In effect, where permanent contracts represent the most common type of employment, governments were often unable to obtain support for reforms that weaken dismissal rules for permanent employees, and focused instead on easing the regulations on temporary contracts (Saint-Paul, 1999).

Boeri (2010b) labels this type of reform as ‘two-tier’ since it widens asymmetries in the employment protection afforded to permanent and temporary workers. More generally, Boeri proposes a typology of reforms of labour market institutions (including EPL) based on the following three criteria:

• The orientation of the reform, i.e. whether it is intended to increase or reduce the ‘wedge’ between labour supply and demand (compared to a no policy scenario).
• The size of the reform, i.e. whether it changes the intensity of the policy significantly or only marginally. In other words, is it a discrete⁽¹²⁾ or an incremental reform?
• The scope of the reform i.e. whether it involves all of the potentially eligible population (in the case of EPL, all workers) or just a subset, such as temporary employees. In other words, is it a ‘complete’ or ‘two-tier’ reform⁽¹³⁾?

Boeri (2010b) uses this typology to classify reforms carried out in a number of European and non-European countries between 1980 and 2007 in four labour market policy areas, namely:

• Employment Protection Legislation (EPL),
• Unemployment Insurance (UI),
• Activation Programmes (AP),
• Employment Conditional Incentives (ECI).

A simple count of measures indicates that EPL reforms represent about one in every four reforms, of which approximately 60% have reduced the wedge between labour supply and demand (i.e. eased regulations).

As regards the scope of measures, in the four labour market policy areas reviewed, the number of two-tier reforms is similar to the number of complete ones. As regards size, discrete reforms (i.e. representing large changes in regulations) account for about 40% of total reforms and, particularly in the EPL policy area, discrete reforms are mostly two-tier (as opposed to complete). There seems to be a trade-off between the size and scope of reforms, with larger reforms more likely to be two-tier. Boeri’s taxonomy highlights the fact that a large number of changes in EPL have had the effect of widening regulatory asymmetries between permanent and temporary workers rather than easing EPL for all employees, thereby contributing to the creation of dual systems.

Spain is widely seen as clear-cut example of labour market dualism. In 1984, a two-tier EPL reform liberalised the use of temporary contracts, while maintaining EPL unchanged for permanent contracts. The incidence of temporary contracts in total paid employment rose from about 15% in the mid-1980s to close to 30% in 1990, because temporary contracts involve much lower firing costs, both in terms of severance payment and the possibility to appeal to labour courts in the event of dismissal (Bentolila and Dolado, 1994).

However Spain is far from being a unique case and other EU Member States have also introduced two-tier reforms as shown in Chart 4 and Chart 5, which break down changes in the overall EPL indicator from the mid-1980s to 2008 between permanent contracts (dark blue) and temporary contracts (bright blue).

These charts indicate that changes in the overall EPL indicator mainly reflect developments with regard to temporary contracts, particularly in Belgium, Denmark, Germany, Greece, Italy, Netherlands, Portugal and Sweden⁽¹⁴⁾. The situation in France has changed over time in ways that are not captured in the charts. Temporary contracts were introduced in 1979 but their use was then restricted during the 1980s, prior to being relaxed during the 1990s with the possibility of using short-term contracts (CDD)⁽¹⁵⁾ for targeted groups of workers (Blanchard and Landier, 2002).

The prevalence and scale of two-tier reforms highlight the limitations of some of the literature on the impact of EPL on labour market performance, which tends to focus largely on complete reforms⁽¹⁶⁾, and to overlook the impact of two-tier reforms. A specific theoretical framework is required for the latter in order to identify policy effects.

Boeri and Garibaldi (2007) and Boeri (2010b) have attempted to fill this gap with an extension of the widely used Mortensen and Pissarides search and matching model, in which it is possible to distinguish existing jobs that are affected by EPL⁽¹⁷⁾ from newly created jobs which can be terminated at no cost to the firm during a limited period, thereafter being transformed into permanent jobs and subject to firing ‘taxes’. Hence, entry jobs are equivalent to temporary jobs with no employment protection. Results obtained using this framework suggest that the effects of two-tier EPL reforms on aggregate variables can differ substantially from those of complete reforms.

On the one hand, applying uniform firing ‘taxes’ lowers both job loss and finding rates (as firing ‘taxes’ discourage hiring)⁽¹⁸⁾ with ambiguous effects on aggregate unemployment and wages⁽¹⁹⁾. On the other hand, if firing taxes only apply to continuing jobs, firms have an incentive to use entry jobs (instead of continuing ones) as a mechanism to adjust total labour demand. Regulatory asymmetry between the two types of jobs will increase both hiring rates (as entry jobs are exempted from firing taxes) and job loss rates for entry jobs as firms circumvent increasing firing taxes through a reduction in conversion rates of entry jobs into continuing ones⁽²⁰⁾. Overall, while introducing uniform EPL on all types of jobs unambiguously reduces total labour turnover, a twotier EPL system may increase it as long as a larger turnover on entry jobs more than offsets the reduced turnover on continuing ones.

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(10)	Particularly in Continental Europe.
(11)	E.g. contracts of collaborazione coordinata e continuativa and later, collaborazione a progetto in Italy, corresponding to ‘quasi-self-employment’.
(12)	Discrete reforms are defined as those that change the intensity of policies, measured using indicators such as OECD’s EPL, by a minimum threshold (e.g. at least one tenth of the cross-country standard deviation of the indicator).
(13)	More specifically, two-tier reforms are defined as those which affect less than 50% of the population potentially eligible or which involve all of it but only gradually and in the long-term, i.e. after a transition period of at least 30 years.
(14)	The large deregulation carried out in Spain predates the periods covered by EPL figures and so it is not identified in the Charts.
(15)	‘Contrat à Durée Déterminée’.
(16)	Looking either at cross-country differences in the level of EPL or at within-country changes in EPL intensity over time.
(17)	In this framework, EPL is represented for simplicity as a sum of money firms need to pay when dismissing a worker. Such money is ‘pure waste’, i.e. is not used for any purpose (such as redistribution, financing public goods etc.).
(18)	The latter reflects the reduced number of open vacancies.
(19)	The ambiguous effect on wages results from two opposite effects: the rising bargaining strength of workers and the presence of more low-productivity and low paid jobs in equilibrium.
(20)	Firms also aim to avoid greater labour costs associated with continuing jobs. The latter category enjoys greater bargaining strength vis-à-vis employees in entry jobs thanks to higher firing costs, resulting in higher wages compared to the entry/fixed-term wages.