Several European countries have chosen to introduce more flexibility to their labour
markets by allowing employers to use temporary contracts. But according to new
research by Professor Olivier Blanchard and Augustin Landier, published in the
latest issue of the Economic Journal, the introduction of temporary contracts appears to
have had perverse effects, decreasing the welfare of those it was supposed to help,
namely the young and the unemployed.
Temporary contracts are not subject to the high ‘firing costs’ of permanent contracts. In
France, for example, firms now can, under some conditions, hire workers for a fixed
duration, at the end of which separation occurs with low costs for the employer. But if
workers are kept beyond this fixed duration, later separation becomes subject to normal
firing costs.
The researchers explore how the coexistence of these two types of contracts might
affect hirings, separations and wages in the labour market. They argue that contrary to
its initial purpose, this type of reform may be detrimental to the welfare of new entrants
and unemployed workers.
The reason is simple. Temporary contracts make it more attractive for employers to
hire. But when temporary contracts come to an end, the difference between firing costs
for permanent contracts and for temporary contracts make it more attractive for
employers to hire a new worker rather than give a permanent contract to the existing
worker.
The result may well be an increase in turnover of workers, an increase in the time it
takes to find stable employment and a decrease in welfare for new entrants to the
labour force and the unemployed.
The researchers then turn to the evidence, examining the experience of France, where
the proportion of temporary contracts in salaried employment has increased from 1.4%
in 1983 to 10.8% in 2000.
Using panel data and focusing on the young (20-24), they find that the reforms have
been associated with a substantial increase in turnover, and an increase in the time it
takes for entrants to find permanent unemployment. In short, the introduction of
temporary contracts appears to have had perverse effects, decreasing the welfare of
those it was supposed to help, namely the young and the unemployed.
ENDS
Notes for Editors: ‘The Perverse Effects of Partial Labour Market Reform: Fixed-term
Contracts in France’ by Olivier Blanchard and Augustin Landier is published in the June
2002 issue of the Economic Journal as part of a symposium on temporary work. The
authors are at the Massachusetts Institute of Technology.
For Further Information: contact RES Media Consultant Romesh Vaitilingam on 0117-
983-9770 or 07768-661095 (email: romesh@compuserve.com); or Professor Olivier
Blanchard via email: blanchar@mit.edu.