European Governments made substantial efforts to reform labor market institutions when walking away from the Eurosclerosis of the 1980s. To achieve political viability, the reforms mostly entailed changing the rules only for new hires and introducing a wide array of new flexible, fixed-term, contractual types or expanding their scope where they already existed. There were hardly any changes in rules on regular, open-ended contracts. This created two parallel labor markets – a labor market largely insulated from shocks (workers with permanent contracts) and a labor market of temporary workers, where all risks are concentrated. In order to complete the reform path, governments are now facing the challenge to fight dualism in European labor markets.
In April 2012, an IZA Conference in cooperation with FEDEA and Fondazione Rodolfo Debenedetti was held in Milan to discuss “Dual Labor Markets and the Single Contract”. The event was organized by Samuel Bentolila (CEMFI, Madrid), Tito Boeri (Bocconi University and IZA), Juan Jose Dolado (Universidad Carlos III de Madrid and IZA), IZA Program Director Pierre Cahuc (Ecole Polytechnique, Paris) and IZA Deputy Program Director Konstantinos Tatsiramos (University of Leicester).
The conference brought together leading researchers in the field who presented their work on dual labor markets and on reforms targeted at fighting dualism. The first session of the conference was devoted to the modeling of a single contract that makes job security provisions increase smoothly as workers acquire tenure. J. Ignacio Garcia Perez (Universidad Pablo de Olavide) analyzed the effect of introducing a single open-ended contract in Spain. Simulating a search and matching model of job creation and job destruction, which is able to generate the main properties of labor market segmentation that exist in Spain, the authors of the paper find that the introduction of the single contract decreases steady-state unemployment and job destruction and smoothes both the probability of being fired and tenure distribution, as severance payments are smoothed. Pietro Garibaldi (University of Turin and IZA) presented a paper that shows under which conditions a mandated transfer from the employer to the worker in the case of an unfair dismissal is optimal, and how efficient severance relates to monitoring technologies and jurisprudence. The authors also evaluate the empirical implications of the model as to the relation between graded employment security and the wage tenure profile in countries with and without mandated severance in case of fair economic dismissals.
The second session of the conference focused on the analysis of dual labor markets covering issues such as the effect of temporary employment on productivity and labor turnover. Juan Jose Dolado presented evidence from Spain showing that when the employment protection gap between permanent and temporary jobs is increased, workers face lower transition rates from temporary to permanent jobs, which in turn lowers firms’ productivity. Marco Leonardi (University of Milan and IZA) analyzed the effect of reforms in temporary employment in Italy providing evidence that there is substantial substitution across different types of temporary contracts induced by these reforms. This substitution may have differential effects on firm productivity and should be taken into account by policy makers when evaluating the effectiveness of policy interventions.
Franck Malherbet (University of Rouen and IZA) analyzed the decision of the firm between creating a permanent and a temporary job taking into account an important feature of the legislation, which is that although temporary jobs have no firing cost, employers cannot dismiss temporary workers before the date of termination of the contract. Considering production opportunities with different horizons, in the presence of large firing costs, firms will hire permanent workers for long-term projects and temporary workers for short-term projects, which induces higher labor turnover for temporary workers, small negative effects on employment but large negative effects on aggregate production. Alvaro Novo (Banco de Portugal and IZA) examined the effect of a reform in Portugal, which increased the employment protection of open-ended contracts, finding an increase in the share and in the excess turnover of fixed-term contracts. These results suggest a high degree of substitutability of workers on the two types of contracts and an increased burden of adjustment placed on the more flexible contracts. Cristina Tealdi (IMT Lucca) performed a welfare analysis of the introduction of a fixed-term contract. Comparing the average income of different groups of individuals, she finds that more productive workers fare better in a dual labor market, while junior and less productive workers pay the cost of higher turnover and lower wages.
The conference ended with a panel discussion moderated by Juan Jose Dolado on the recent policy reforms in the labor markets and in particular on employment protection. Panelists were Lennart Janssens (European Commission), Pedro Portugal (Banco de Portugal and IZA) and Danielle Venn (OECD). They discussed the possibility to introduce the single contract in countries where labor markets are strongly segmented.
Conference program:
www.iza.org/link/dlmsc2012
