The use of fixed term contracts may help young workers without any qualifications get their first job, but they reduce their employment and earnings over time. This is the conclusion of research into a Spanish labour market reform that lowered the cost of firing people by liberalising fixed-term contracts.
The study by Jose Ignacio Garcia, Ioana Marinescu and Judit Vall Castelló published in the May 2019 issue of The Economic Journal, shows that fixed term contracts led to a 9.8% decrease in earnings and a 4.9% reduction in the days male school dropouts worked over the first ten years of their working lives. They also show that this negative effect on employment and pay persists 27 years after the start of their careers.
Fixed term contracts allow employers to specify the duration of contracts after which the worker can be let go at a low cost to the employer in contrast to the higher cost of firing workers on permanent contracts. In theory, having lower firing costs should improve young people’s access to jobs as they are seen as risky hires because they have little or no prior working experience. Such contracts have become very popular in many European countries, especially in Spain where 94% of all new signed contracts are fixed-term.
Spain liberalised the use of fixed term contracts in 1984 and this study focuses on the impact of young men who left school without any qualifications. The authors compare men who were able to start working just prior to the reforms to those who started after they were introduced. They show that men who were able to start working after the reform were slightly more likely to hold a job by the age of 19. Therefore, the researchers argue that fixed-term contracts may help young workers with no qualifications get their first job.
However, the danger is that young workers remain on fixed term contracts leading to lower employment stability and no progression towards better jobs leading to a reduction in employment and earnings over the long term. Examining social security data, the researchers show that fixed term contracts led to a 4.9% reduction in the number of days employed and 9.8% fall in earnings over the first 10 years of their careers. This negative impact persists even after 27 years of working.
This research has lessons for policies aimed at reducing youth unemployment. Fixed term contracts lower the costs of firing an employee which should mean that employers are more willing to take the risk of hiring a young person for the job. However, the authors show that liberalising fixed-term contract did not help Spanish youth in the long term. They conclude that fixed-term contracts are not a stepping stone but rather a stumbling block for the careers of low skilled youths.
'Can Fixed-term Contracts put low skilled youth on a better career path? Evidence from Spain' by Jose Ignacio Garcia, Ioana Marinescu and Judit Vall Castelló is published in the May 2019 issue of The Economic Journal
Department of Economics at Universidad Pablo de Olavide
Department of Economics at Universitat de Barcelona & IEB