The low conversion rates of temporary into permanent contracts found in the empirical literature have led some authors (e.g. Guell and Petrongolo, 2007) to investigate other possible roles for temporary contracts as:
The screening role of temporary contracts results from the existence of asymmetric or incomplete information in the sense that firms and workers need time to assess the productivity/suitability of a particular job match before committing themselves to a more lasting association.
Alternatively, for firms facing adverse (and temporary) shocks, temporary workers may provide a buffer to adjust employment levels, while permitting them to keep stable levels of permanent workers, thereby cutting adjustment costs both in terms of severance payments and losses in firm-specific human capital.
A prevalence of the latter type of behaviour over the former would be an indication of a truly segmented labour market, i.e. one in which temporary jobs are just a cheaper and more flexible alternative to permanent work.
Using Spanish data for the period 1987-2002, Guell and Petrongolo (2003) assessed the use of temporary contracts, their determinants and conversion rates into permanent contracts. They found ‘spikes’ in conversion rates after one year, and after three years, of job tenure, where the latter coincides with the maximum legal duration of temporary contracts in Spain. Findings suggest a double use for temporary contracts: as a screening device that leads to conversions into permanent jobs after one year, but also as a ‘forced’ conversion mechanism at the maximum legal duration of temporary contracts, with the latter being used more frequently for low-skilled workers.
Booth et al. (2002) have looked at the use of temporary contracts in the UK between 1991 and 1997, i.e. a labour market that, unlike the Spanish one, is less strictly regulated with regard to permanent contracts. They found evidence that temporary contracts represent effective stepping stones to permanent jobs and that the wage penalty associated with their use at the start of a career tends to be transitory, i.e. temporary workers tend to catch up with permanent workers in terms of lifelong earnings. Evidence for Sweden (Larsson et al., 2005) is also positive overall, suggesting that having a (long-duration) temporary contract reduces the risk of future unemployment, and raises the probability of being offered a permanent one at the same establishment 2 to 2½ years after the start of the temporary one.
An indication of the ease with which it is possible to move from temporary to permanent work can be obtained by calculating transition rates(42). Chart 29 plots the (odds)-ratio between the share of temporary workers moving to a permanent job in one year relative to the share of those remaining in a temporary job. A value higher than one indicates a greater chance of moving to a more stable job in one year than remaining in a temporary job, suggesting a stepping stone role for temporary work.
The results suggest that those Member States which have pursued two-tier EPL reforms tend to have odd-ratios lower than one (Belgium, Greece, Spain, France, Italy and Portugal, together with some new Member States such as the Czech Republic, Cyprus, Poland and Slovenia), suggesting that temporary workers may be ‘trapped’. Conversely, in Ireland, Latvia, Slovakia and the UK, temporary workers are 1.5 to 2 times more likely to move to a permanent contract in one year than they are to remain in a temporary one. Charts 30 to 32 break down the temporary-to-permanent transitions by gender, age groups, and education level. The cross-country patterns are not as clear cut as in the overall indicator, suggesting a degree of heterogeneity with respect to different variables.
(42) | I.e. the percentage of workers in a temporary job in year t moving to a permanent job in year t+1. |
(43) | I.e. 11 out of 19 for which data are available. |
(44) | 12 out of 20. |
(45) | 11 out of 19. |
(46) | I.e. the odd-ratio increasing/decreasing with the level of education. |