The value of flexible contracts; evidence from an italian panel of industrial firms
Since the mid-1980s fixed-term contracts have been used in many European countries to reduce firing costs. As this strategy may have led to segmented labour markets, recent policy interventions have enhanced permanent jobs by cutting their labour costs. Efficient design of these policies requires knowledge of the costs associated with employment protection legislation. In this paper we evaluate these costs by measuring firmsï¿½ willingness to trade fixed-term for open-ended contracts in exchange for a cut in the labour cost of permanent jobs. Our results are based on a panel of Italian firms in the engineering sector whose labour costs were reduced by a tax credit granted to firms hiring workers on open-ended rather than fixed-term contracts. The trade-off is identified by comparing how the composition of recruitment by type of contract changed for firms that received the tax credit and those that did not. Potential distortions due to self-selection into the programme, firm-specific timevarying shocks or mechanical correlation induced by the selection rule into the programme, are accounted for by estimating the spurious effect of the tax credit in the years when it was not in force. Estimation is carried out in both a parametric and non-parametric setting that uses p-score to control for different probabilities of receiving the tax credit. We found that firms value the possibility of hiring one per cent new workers on a fixed-term contract as much as a cut in the labour cost of an open-ended worker in the range of 1.3-2.8 per cent. This result helps to explain recent employment growth in Italy, where the share of fixed-term contracts among new hires grew from 34 to 42 per cent between 1995 and 2003. Using our most conservative results, we evaluate that the labour cost reduction associated with this expansion amounted to anything between 10.4 and 22.4 per cent. Given the elasticity of employment to wages, the advent of flexibility in the Italian labour market can account for a large share, between 37 and 80 per cent, of employment growth in the private sector.
|Date of creation:||Mar 2006|
|Contact details of provider:|| Postal: Via Nazionale, 91 - 00184 Roma|
Web page: http://www.bancaditalia.it
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Victor Aguirregabiria & Cesar Alonso-Borrego, 2009.
"Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain,"
tecipa-346, University of Toronto, Department of Economics.
- Victor Aguirregabiria & Cesar Alonso-Borrego, 2014. "Labor Contracts And Flexibility: Evidence From A Labor Market Reform In Spain," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 930-957, 04.
- Alonso-Borrego, César & Aguirregabiria, Víctor, 1999. "Labor contracts and flexibility : evidence from a labor markt reform in Spain," DES - Working Papers. Statistics and Econometrics. WS 6302, Universidad Carlos III de Madrid. Departamento de Estadística.
- Alonso-Borrego, César & Aguirregabiria, Víctor, 2009. "Labor contracts and flexibility : evidence from a labor market reform in Spain," UC3M Working papers. Economics we091811, Universidad Carlos III de Madrid. Departamento de Economía.
- James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998.
"Characterizing Selection Bias Using Experimental Data,"
Econometric Society, vol. 66(5), pages 1017-1098, September.
- James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998. "Characterizing Selection Bias Using Experimental Data," NBER Working Papers 6699, National Bureau of Economic Research, Inc.
- cipollone piero & Anita Guelfi, 2003. "tax credit policy and firms' behaviour: the case of subsidy to open-end labour contract in italy," Temi di discussione (Economic working papers) 471, Bank of Italy, Economic Research and International Relations Area.
- Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, 2002.
"Employment consequences of restrictive permanent contracts: Evidence from Spanish labor market reforms,"
Economics Working Papers
651, Department of Economics and Business, Universitat Pompeu Fabra.
- Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, . "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms," Working Papers 2003-14, FEDEA.
- Kugler, Adriana & Jimeno, Juan F. & Hernanz, Virginia, 2002. "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms," IZA Discussion Papers 657, Institute for the Study of Labor (IZA).
- Hernanz, Virginia & Jimeno, Juan F & Kugler, Adriana D., 2003. "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labour Market Reforms," CEPR Discussion Papers 3724, C.E.P.R. Discussion Papers.
- John M. Abowd & Francis Kramarz, 1997.
"The Costs of Hiring and Separations,"
NBER Working Papers
6110, National Bureau of Economic Research, Inc.
- Dominique Goux & Eric Maurin & Marianne Pauchet, 1999.
"Fixed-term Contracts and the Dynamics of Labour Demand,"
99-02, Centre de Recherche en Economie et Statistique.
- Goux, Dominique & Maurin, Eric & Pauchet, Marianne, 2001. "Fixed-term contracts and the dynamics of labour demand," European Economic Review, Elsevier, vol. 45(3), pages 533-552, March.
- Richard Blundell & Monica Costa Dias, 2000. "Evaluation methods for non-experimental data," Fiscal Studies, Institute for Fiscal Studies, vol. 21(4), pages 427-468, January.
- Brian Bell & Richard Blundell & John Reenen, 1999.
"Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies,"
International Tax and Public Finance,
Springer;International Institute of Public Finance, vol. 6(3), pages 339-360, August.
- Brian Bell & Richard Blundell & John Van Reenen, 1999. "Getting the unemployed back to work: the role of targeted wage subsidies," IFS Working Papers W99/12, Institute for Fiscal Studies.
- David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005.
"Trends in U. S. Wage Inequality: Re-Assessing the Revisionists,"
Harvard Institute of Economic Research Working Papers
2095, Harvard - Institute of Economic Research.
- David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Trends in U.S. Wage Inequality: Re-Assessing the Revisionists," NBER Working Papers 11627, National Bureau of Economic Research, Inc.
- Pietro Garibaldi & Giovanni L. Violante, 2005.
"The Employment Effects of Severance Payments with Wage Rigidities,"
Royal Economic Society, vol. 115(506), pages 799-832, October.
- Garibaldi, Pietro & Violante, Giovanni L, 2004. "The Employment Effects of Severance Payments with Wage Rigidities," CEPR Discussion Papers 4608, C.E.P.R. Discussion Papers.
- Andrea Brandolini & Piero Casadio & Piero Cipollone & Marco Magnani & Alfonso Rosolia, 2007. "Employment Growth in Italy in the 1990s: Institutional Arrangements and Market Forces," AIEL Series in Labour Economics, in: Nicola Acocella & Riccardo Leoni (ed.), Social Pacts, Employment and Growth. A Reappraisal of Ezio Tarantelli’s Thought, edition 1, chapter 4, pages 31-68 AIEL - Associazione Italiana Economisti del Lavoro.
- Andrew Benito & Ignacio Hernando, 2003. "Labour demand, flexible contracts and financial factors: new evidence from Spain," Working Papers 0312, Banco de España;Working Papers Homepage.
- Hamermesh, Daniel S. & Pfann, Gerard Antonie, 1996.
"Adjustment Costs in Factor Demand,"
CEPR Discussion Papers
1371, C.E.P.R. Discussion Papers.
- James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Oxford University Press, vol. 64(4), pages 605-654.
When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_583_06. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.