August 2009

IZA DP No. 4380: Why Do Firms Use Fixed-Term Contracts?

Temporary forms of employment account for a variable but never trivial share of total employment in both the U.S. and in Europe. In this article we look at how one specific form of temporary employment − employment with fixed-term contracts − fits into employers' hiring policies. We find that human capital variables (schooling, skills and employer-provided training) as measured at the levels of the worker and the workplace are important determinants of the employers’ decisions to hire with fixed-term contracts and to promote temporary workers to permanent positions. Those employers that hire more with fixed-term contracts are also those that are more likely to offer a permanent position to their newly-hired temporary employees. Our results indicate that fixed-term contracts are used as mechanisms for screening workers for permanent positions.