During the past decades, reforms of employment protection legislation (EPL) introduced in European countries have often been ‘partial’ or ‘two-tier’, i.e. they have substantially deregulated the use of temporary contracts, while maintaining stringent firing rules for permanent ones, rather than reforming EPL ‘across-the-board’. Some labour economists argue that such reforms have distinct effects relative to ‘complete’ ones. Two-tier reforms have led, firstly, to a large expansion of temporary employment and, secondly, to the emergence of dual labour markets i.e. one for permanent employees (or ‘insiders’) with stable employment and good career and earnings prospects, and another for temporary employees (or ‘outsiders’) who tend to be ‘trapped’ into temporary jobs with precarious attachment to the labour market (Spain being the most prominent example of such a trend).
In several EU countries, a large share of hiring takes place via temporary contracts, mainly affecting young workers. Temporary jobs account for around 40% of total dependent employment among young workers in the EU, i.e. about four times the level for the total working-age population. Both descriptive and econometric evidence find that labour market segmentation lowers transition rates from temporary to permanent employment, and constitutes a severe handicap to moving to better paid jobs.
Temporary jobs can fulfil a number of functions. They can provide a ‘screening’ device allowing firms to evaluate workers’ ability/adequacy for the job. In this sense, temporary jobs can act as a ‘gateway’ to the labour market and as potential ‘stepping stones’ to more stable and better paid jobs. Temporary contracts can act as a buffer, facilitating firms’ adjustment to temporary demand shocks, thereby avoiding costly adjustments to their ‘core’ labour force. Conversely, temporary contracts can simply be a convenient way for firms to reduce labour costs, substituting temporary for permanent workers. The evidence suggests that the latter function plays a more prominent role in segmented labour markets.
Overall, two-tier reforms increase both hiring and separation rates. Although temporary workers have been disproportionately affected by job cuts during the 2008-2009 recession, net employment gains since 2000 remain positive overall in the EU and in the largest Member States, reflecting the overall positive effect that such reforms had on employment creation through the accrued flexibility in labour markets. Nevertheless, two-tier reforms have also induced changes in the composition of the workforce, leading to a partial substitution of temporary for permanent workers. This is in line with economic theory that predicts that two‑tier EPL reforms initially yield a ‘honeymoon effect’ on employment via the expansion of temporary work, with such gains being gradually eroded. In some circumstances, namely when the regulatory asymmetry (between permanent and temporary contracts) is particularly large, two-tier EPL reforms could even reduce total employment (i.e. the positive effect on recruitment could then be more than balanced out by the negative impact on job losses).
Temporary workers in general and young people in particular have been particularly hard hit during the recent recession. This largely represents the countercoup of the large expansion of temporary work in those countries that had previously implemented ‘two-tier’ EPL reforms. Hence, segmentation has increased the business cycle volatility of employment. According to the OECD, the business cycle sensitivity of total hours worked for temporary workers is about 2½ times greater than for permanent ones. Evidence provided in the chapter highlights that in a segmented labour market such as Spain, the adjustment of employment levels to the business cycle is overwhelmingly borne by temporary workers, whereas this is much less the case in Germany or the UK. Econometric estimates suggest that cyclical variations of employment in relation to GDP fluctuations are higher in Member States with a higher incidence of temporary employment.
Temporary workers tend to have reduced access to training provided/subsidised by firms as the limited duration of their employment relationship discourages investment in (firm-specific) human capital. Conversely, results from econometric analysis show that temporary workers with a medium-to-low level of initial education are more likely to participate in further ‘formal’ education, thereby suggesting the existence of a ‘catching-up’ effect.
Low conversion rates of temporary into permanent jobs may discourage temporary workers from exerting effort on the job. The evidence for countries with a high incidence of temporary work (e.g. Spain) suggests that the combined effects of reduced vocational training and lower work effort might be a significant slowdown in the growth rate of total factor productivity.
Segmentation also affects wage formation and pay levels. Evidence suggests that a high incidence of temporary work raises wages for permanent workers, as their bargaining power is strengthened by the presence of temporary workers who have a higher probability of being dismissed. Furthermore, temporary contracts often involve a substantial wage penalty. After controlling for a number of personal characteristics, estimates show that temporary workers earn on average significantly less than permanent staff in the EU.
Although temporary work may facilitate the transition process from education to the world of work, particularly in those countries where the apprenticeship system is underdeveloped, labour market segmentation increases the risk that many young people will become trapped (even into their thirties), moving for years between temporary jobs and unemployment interludes, with limited career prospects. A precarious start to adult life is likely to exacerbate perceived insecurity, thereby impacting on individuals’ behaviour. Evidence from a number of countries suggests that young people with temporary jobs (rather than permanent ones) tend to have a higher incidence of co‑residence with their parents, which tends to delay emancipation, household formation and childbearing decisions.
Young people are particularly vulnerable at the moment of moving from school to work, especially the least qualified who have the greatest difficulties in getting a foothold in the labour market. Econometric estimates show that tertiary educated individuals are at least twice as likely to experience good transitions (e.g. from joblessness to employment or from temporary to permanent employment) than individuals with only primary education. The share of NEET (Not in Education, Employment or Training) youth provides a good measure of employment integration of young labour market entrants and varies significantly within the EU from as low as about 4% in Denmark and the Netherlands to as high as 16-20% in Italy, Cyprus and Bulgaria.
Recent work from the OECD confirms the finding that the sensitivity to the economic cycle of employment rates for the young is higher than for prime-age adults. Furthermore, the sensitivity of youth unemployment to the economic cycle tends to decline progressively with age, being greater for teenagers (15 to 19 years) than for young adults (20 to 24 years) in most countries. Although a larger responsiveness of youth employment to cyclical conditions is a natural feature of labour markets(52), there is also ample evidence suggesting that a spell in unemployment early in adult life (i.e. teenage or early twenties) has lasting negative effects both in terms of future employment and wage prospects, although the literature seems divided as regards the extent of these effects.
Recent academic work by a number of well-known European labour economists suggest the need to develop a comprehensive strategy, based largely on flexicurity principles, in order to tackle labour market segmentation by providing a kind of roadmap to exit dualism. It is important to stress that such a strategy should encompass several policy initiatives tailored to national circumstances (i.e. no “one-size-fits-all” strategy). The set of measures proposed includes the adoption of a ‘single permanent contract’, replacing the existing legal asymmetry between permanent and fixed-term contracts. Such contract would be characterised by employment security increasing concurrently with job tenure (e.g. through the gradual rise in severance payments rights).
However, the ‘single contract’ alone is unlikely to solve the problem of labour market dualism, as the use (or abuse) of temporary contracts is not solely linked to legal aspects concerning employment contracts but is also affected by production patterns, social dialogue practices, firms’ human resource policies, etc(53). For this reason, other accompanying measures are often mentioned, such as the introduction of a minimum wage; universal eligibility to unemployment insurance regardless of the type of contract; and limiting the application of temporary contracts to specific circumstances, such as genuine temporary tasks or highly paid work. A framework for youth employment recently proposed by the European Commission as a part of its “Youth on the Move” initiative(54) contains many of these elements.
(52) | As a norm, firms first fire less experienced/ younger workers, but younger unemployed tend also to be more adaptable and quickly find a new job than older ones. |
(53) | See the Report ‘Job Security – Facing the challenges of economic change’ produced by the French ‘Conseil de de l’Emploi, des Revenus et de la Cohésion Sociale’ for a discussion. |
(54) | “Youth on the Move”, COM(2010) 477. |