Undesirable Results of Temporary Employment Reform

Labour market reforms to encourage the use of temporary work contracts may have led to temporary employment gains, but these may have come at the price of less training for workers, reduced productivity and higher future unemployment. That is one of the findings of research by Dr Fabio Berton and Professor Pietro Garibaldi, published in the August 2012 issue of the Economic Journal.

But their study also suggests that fears that the labour market reforms implemented in many OECD countries will eventually result in a world in which firms only post temporary vacancies will not necessarily be realised.

On the one hand, firms certainly prefer a world with lower firing costs; but on the other hand, firms must consider that they would hire workers that instead prefer more protected positions. This is enough to prevent temporary jobs from crowding out the entire labour market.

This intuition yields a number of implications, which the researchers argue cast serious doubts on the sense of marginal labour market reforms:

  • First, wealth, and not productivity, may determine which workers get the most preferred jobs. Individuals under tighter budget constraints place a higher value on finding a job as soon as possible. These jobs – as the study proves empirically – are typically temporary. Rather than providing workers with more work opportunities and allocating resources more efficiently, reforms may thus result in a sort of segregation.
  • Second, the research shows theoretically that temporary workers receive less on-the-job training, which harms their productivity. This result appears to be consistent with a growing stream of research suggesting that labour market reforms – and temporary jobs in particular – are the origin of declining productivity in many countries, for example, Italy and Spain.
  • Third, the employment gains that supporters of the marginal reforms often claim may be largely transitory and the long-run number of unemployed individuals may well exceed that of the former ”rigid” system. The employment outcomes of the economic crisis represent the best support for this last consideration.

Workers and Firms Sorting into Temporary Jobs” by Fabio Berton and Pietro Garibaldi is published in the August 2012 issue of the Economic Journal.

Fabio Berton

University of Eastern Piedmont | fabio.berton@sp.unipmn.it

Pietro Garibaldi

University of Turin