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How do employment contract reforms affect welfare? Theory and evidence

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  • Tealdi, Cristina

Abstract

Short-term employment contracts have been deployed rapidly across the European Union (EU) in the past two decades. Characterized by a high degree of flexibility, they were thought to be the solution to persistent labor market rigidities and high unemployment rates. The objective of this paper is to investigate both theoretically and empirically the effects of introducing short-term employment contracts to the labor market, and to draw conclusions regarding the change in welfare for different categories of people. Data from the Italian labor market show that workers hired on a short-term basis are mostly young, female, inexperienced, less educated, and poorly qualified. Short-term contracts, which are associated with lower wages, often come in sequences. Labor force participation has increased in particular among older workers. Such changes in labor force composition and transition patterns can be explained by a search model with workers heterogeneity and differentiated contracts. In steady state, a pooling equilibrium of less and more productive workers exists, when only permanent contracts are available. In the presence of short-term contracts, a separating equilibrium allocates less and more productive workers towards different career paths. Through model calibration it is possible to quantify the change in welfare for different categories of workers. Moreover, within a multi-state duration framework, the model is estimated with the Heckman and Singer non-parametric maximum likelihood (NPMLE) estimation procedure. One of the major findings is that inexperienced workers are worse off after the reforms. However, after the accumulation of some work experience, they have the opportunity to compensate for their losses, if they are more productive. Less productive workers, even though provided with higher chances to work, are the ones paying the cost of higher turnover and lower wages.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33573.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:33573

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Keywords: Labor Economics; Policy;

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References

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  1. Gianna Claudia Giannelli & Ursula Jaenichen & Claudia Villosio, 2009. "Have labour market reforms at the turn of the millennium changed job durations of the new entrants? A comparative study for Germany and Italy," LABORatorio R. Revelli Working Papers Series 95, LABORatorio R. Revelli, Centre for Employment Studies.
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  7. Dale Mortensen, 1984. "Job Search and Labor Market Analysis," Discussion Papers 594, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  11. José Varejão & Pedro Portugal, 2003. "Why do Firms Use Fixed-Term Contracts?," Working Papers w200308, Banco de Portugal, Economics and Research Department.
  12. Fabio Berton & Pietro Garibaldi, 2012. "Workers and Firms Sorting into Temporary Jobs," Economic Journal, Royal Economic Society, vol. 122(562), pages F125-F154, 08.
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  14. Bentolila, Samuel & Saint-Paul, Gilles, 1991. "The Macroeconomic Impact of Flexible Labour Contracts: An Application to Spain," CEPR Discussion Papers 596, C.E.P.R. Discussion Papers.
  15. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Quanta flessibilità è necessaria?
    by critealdi in Noise from Amerika on 2012-03-15 10:23:36
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Cited by:
  1. Andrea Vindigni & Simone Scotti & Cristina Tealdi, 2013. "Uncertainty and the Politics of Employment Protection," Carlo Alberto Notebooks 298, Collegio Carlo Alberto.
  2. Edoardo Di Porto & Leandro Elia & Cristina Tealdi, 2013. "The "emersion" effect: an ex post and ex ante social program evaluation on labor tax evasion in Italy," Working Papers 2/2013, IMT Institute for Advanced Studies Lucca, revised Jun 2013.
  3. Tealdi, Cristina, 2011. "Typical and atypical employment contracts: the case of Italy," MPRA Paper 39456, University Library of Munich, Germany.

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