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How do employment contract reforms affect welfare? Theory and evidence

  • Tealdi, Cristina

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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  1. Giannelli, Gianna Claudia & Jaenichen, Ursula & Villosio, Claudia, 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," IZA Discussion Papers 4591, Institute for the Study of Labor (IZA).
  2. 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 915-38, October.
  3. Fabio Berton & Pietro Garibladi, 2006. "Workers and Firms Sorting into Temporary Jobs," LABORatorio R. Revelli Working Papers Series 51, LABORatorio R. Revelli, Centre for Employment Studies.
  4. Maia Güell & Barbara Petrongolo, 2003. "How binding are legal limits? Transitions from temporary to permanent work in Spain," Economics Working Papers 682, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2005.
  5. 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.
  6. Dale Mortensen, 1984. "Job Search and Labor Market Analysis," Discussion Papers 594, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. José Varejão & Pedro Portugal, 2003. "Why do Firms Use Fixed-Term Contracts?," Working Papers w200308, Banco de Portugal, Economics and Research Department.
  8. James J. Heckman & V. Joseph Hotz & James R. Walker, . "New Evidence on the Timing and Spacing of Births," University of Chicago - Population Research Center 85-1, Chicago - Population Research Center.
  9. Fabio Berton, 2008. "The (long) run out of unemployment: are temporary jobs the shortest way?," LABORatorio R. Revelli Working Papers Series 76, LABORatorio R. Revelli, Centre for Employment Studies.
  10. 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.
  11. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  12. Pedro Silos & Enchuan Shao & Shutao Cao, 2011. "Fixed-Term and Permanent Employment Contracts: Theory and Evidence," 2011 Meeting Papers 872, Society for Economic Dynamics.
  13. 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.
  14. Olivier Blanchard & Augustin Landier, 2001. "The Perverse Effects of Partial Labor Market Reform: Fixed Duration Contracts in France," NBER Working Papers 8219, National Bureau of Economic Research, Inc.
  15. Fabio Berton & Francesco Devicienti & Lia Pacelli, 2007. "Temporary jobs: Port of entry, Trap, or just Unobserved Heterogeneity?," LABORatorio R. Revelli Working Papers Series 68, LABORatorio R. Revelli, Centre for Employment Studies.
  16. Heckman, James J. & Singer, Burton, 1984. "Econometric duration analysis," Journal of Econometrics, Elsevier, vol. 24(1-2), pages 63-132.
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