Allowing firms to use temporary contracts has contributed to reducing unemployment rates in Europe by more than one percentage point. What''s more, in the vast majority of European countries, temporary contracts are not a dead-end but a stepping-stone into permanent employment: almost half of the workers employed under temporary contracts move into permanent employment within a year.


These are the main conclusions of research by Dr Renato Faccini, published in the March 2014 issue of the Economic Journal. The evidence in his study is consistent with the view that employers use temporary contracts to screen workers for permanent positions. This perspective emphasises that it takes time for workers to realise whether they like a job and for their employers to assess whether they are suitable for it.


As Dr Faccini says:


''Just like couples that live together before getting married as a way of getting to know each other better, temporary contracts can serve as a means to test the job match before entering into a permanent contract, which is costly to terminate.''


This perspective differs from the traditional approach in economic research, which considers temporary contracts as an instrument to increase flexibility. Because not renewing a temporary job is cheaper than firing a permanent worker, firms that employ temporary workers can more easily adjust the workforce to swings in economic activity.


Under this assumption, temporary contracts might end up raising unemployment, as they are likely to destroy more jobs than they create. Worse than that, some researchers warn of the risk that increasing flexibility by expanding temporary contracts can create segmented labour markets, in which part of the workforce is trapped in low-paid, low-productivity temporary jobs with little prospect of upward mobility.


The evidence in this new study suggests that such perverse effects of labour market reforms only affect a minority of workers in European countries, with the exceptions of Spain and France, where mobility from temporary to permanent employment is exceptionally low.


Furthermore, the evidence that temporary contracts have decreased unemployment rates in Europe is difficult to reconcile with models of the labour market where workers are hired on temporary contracts as a way to increase employment flexibility.


Following the economic crisis, unemployment rates have surged again, and temporary contracts have returned to the attention of commentators, policy-makers and academics who believe these contracts are a source of labour market problems rather than a solution.


The new perspective in this study warns against the risks associated with restricting the use of temporary contracts, while acknowledging the need to reform the legislation to improve labour market prospects for the minority of workers who are trapped in recurring spells of unemployment and short-term employment.


Renato Faccini concludes:


''Permitting contracts that facilitate the worker screening process is necessary to achieve high levels of employment, particularly in those countries where firing restrictions are most severe.


''Policy-makers should work towards designing contracts that facilitate the conversion of temporary contracts into permanent positions while preserving the ability of firms to screen at low cost.


''Given that probationary periods in regular positions are akin to built-in temporary contracts, working towards the creation of a unique permanent contract with extended probation could go some way in this direction.


''My analysis suggests that a two-year probationary period should be sufficient to ensure effective screening.''


''Reassessing Labour Market Reforms: Temporary Contracts as a Screening Device'' by Renato Faccini is published in the March 2014 issue of the Economic Journal. Renato Faccini is at Queen Mary, University of London.