Hiring Practices, Employment Protection and Temporary Jobs

This paper examines the e®ects of a two-tier reform of the Employment Protection Legislation that increases °exibility at the margin by allowing ¯rms to hire workers on temporary positions and investigates under which conditions temporary jobs are stepping stones to permanent employment. The analysis has far focused on the role of temporary jobs in employers adjustment to economic shocks and suggested that such reforms have increased unemployment. This study provides new insights on the role of ¯xed-term contracts by supporting the idea that worker turnover results from the allocation of unemployed workers with the right jobs. In such an economy, temporary contracts facilitate the screening process of match quality and increase worker turnover by inducing ¯rms to be less selective in whom they hire. As the fundamental quality of a match is persistent, ¯rms and workers could be induced to continue producing on a regular contract even with high termination costs. Finally, I propose to investigate how temporary jobs would a®ect the US economy where experience rating is an original feature of the unemployment bene¯t system. I ask whether or not introducing temporary jobs while increasing ¯ring costs on regular jobs to ¯nance a given replacement rate increases the employment rate and is welfare-improving.