Boeri (2010a and 2010b) and Bentolila (2010) argue that the widespread use of temporary contracts, resulting from two-tier EPL reforms, increases the business cycle volatility of employment. During upturns, substantial job creation takes place, predominately through temporary contracts, while during downturns substantial job destruction occurs, mainly because temporary contracts are not renewed when they expire. In fact, the extensive use of temporary contracts in countries with highly regulated permanent contracts is likely to amplify the volatility of total paid employment vis-à-vis economic shocks, as illustrated by recent developments in a number of Member States such as Spain.
As regards two-tier reforms, which typically expand the scope for the use of temporary contracts, it is particularly relevant to consider their impact before a new long-term equilibrium is reached. Boeri and Garibaldi (2007) suggest that easing temporary contracts leads to higher employment fluctuations during the economic cycle. In good times, firms increase average employment levels in order to take advantage of the liberalisation of temporary contracts, while the reduction in employment levels during downturns is constrained by the existing stock of permanent workers.
This is what Boeri and Garibaldi (2007) call the ‘honeymoon effect’ of twotier EPL reforms on employment creation, which is likely to be larger, the stricter EPL is on permanent contracts. The increase in the employment intensity of growth registered in several continental EU Member States following the loosening of protection on temporary contracts corroborates this prediction (Garibaldi and Mauro, 2002). However, this model also suggests that employment increases are partly temporary, as firms gradually adjust the stock of permanent workers downwards by means of ‘natural turnover’ (i.e. voluntary departures and retirement), and eventually replace some of the permanent workers by temporary ones.
Given that temporary workers tend to suffer the brunt of the adjustment in downturns, together with the pronounced age profile of the incidence of temporary work, it is not surprising to see that young workers were especially affected by rises in aggregate unemployment between 2007 and 2009 (Chart 33).