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The third worker: Assessing the trade-off between employees and contractors

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  • Pedro S. Martins

Abstract

Firms make labour demand decisions not only between permanent and non-permanent employees but also increasingly more between employees and contractors. Indeed, this third work format can be attractive, also when employment protection law is restrictive. This paper examines empirically this scarcely researched trade-off drawing on a recent reform in Portugal that cut the severance pay of new employee hires while leaving unchanged the regulations affecting contractors. Our analysis draws on difference-in-differences methods and original high-frequency firm-level panel data on both employees and contractors. We find that the reduction in severance pay had a large relative positive effect on the wage bills and worker counts of employees compared to contractors. This result, robust to a number of checks, highlights the role of labour regulations as an additional driver of more flexible labour formats.

Suggested Citation

  • Pedro S. Martins, 2016. "The third worker: Assessing the trade-off between employees and contractors," Working Papers 75, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  • Handle: RePEc:cgs:wpaper:75
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    References listed on IDEAS

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    1. Addison, John T. & Portugal, Pedro & Varejão, José, 2014. "Labor demand research: Toward a better match between better theory and better data," Labour Economics, Elsevier, vol. 30(C), pages 4-11.
    2. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.
    3. Hijzen Alexander & Martins Pedro S., 2020. "No extension without representation? Evidence from a natural experiment in collective bargaining," IZA Journal of Labor Economics, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 9(1), pages 1-31, March.
    4. Martins, Pedro S., 2016. "Should the Maximum Duration of Fixed-Term Contracts Increase in Recessions? Evidence from a Law Reform," IZA Discussion Papers 10206, Institute of Labor Economics (IZA).
    5. Pedro S. Martins, 2016. "Can overtime premium flexibility promote employment? Firm- and worker-level evidence from a labour law reform," Working Papers 72, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    6. Pedro S. Martins, 2009. "Dismissals for Cause: The Difference That Just Eight Paragraphs Can Make," Journal of Labor Economics, University of Chicago Press, vol. 27(2), pages 257-279, April.
    7. Pedro S. Martins, 2021. "30,000 Minimum Wages: The Economic Effects of Collective Bargaining Extensions," British Journal of Industrial Relations, London School of Economics, vol. 59(2), pages 335-369, June.
    8. Arindrajit Dube & Ethan Kaplan, 2010. "Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards," ILR Review, Cornell University, ILR School, vol. 63(2), pages 287-306, January.
    9. Holzmann, Robert & Pouget, Yann & Vodopivec, Milan & Weber, Michael, 2011. "Severance Pay Programs around the World: History, Rationale, Status, and Reforms," IZA Discussion Papers 5731, Institute of Labor Economics (IZA).
    10. Katharine G. Abraham & John Haltiwanger & Kristin Sandusky & James R. Spletzer, 2013. "Exploring Differences in Employment between Household and Establishment Data," Journal of Labor Economics, University of Chicago Press, vol. 31(S1), pages 129-172.
    11. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    12. Damas de Matos, Ana & Parent, Daniel, 2016. "Which firms create fixed-term employment? Evidence from Portugal," Labour Economics, Elsevier, vol. 41(C), pages 348-362.
    13. Pedro S. Martins, 2014. "30,000 minimum wages: The economic effects of collective agreement extensions," Working Papers 51, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    14. Lawrence F. Katz & Alan B. Krueger, 2016. "The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015," Working Papers 603, Princeton University, Department of Economics, Industrial Relations Section..
    15. Pedro S. Martins, 2016. "Do wages increase when severance pay drops? Not in recessions," Working Papers 77, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
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    Cited by:

    1. Pedro S. Martins, 2016. "Employment Resilience through Services Exports? Evidence from Matched Employer-Employee Data," Working Papers 79, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    2. Pedro S. Martins, 2015. "Working to get fired? Regression discontinuity effects of unemployment benefit eligibility on prior employment duration," Working Papers 61, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    3. Pedro S. Martins, 2016. "Do wages increase when severance pay drops? Not in recessions," Working Papers 77, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.

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    More about this item

    Keywords

    Employment law; segmentation; duality; future of work;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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