The Impact of Temporary Contracts on Jobs, Firms and Workers: Evidence from Italy

Concerns over labor market flexibility have been at the center of the European political debate for the past three decades. In response to the widespread belief that rigid employment protection laws (EPL) depress employment, many countries --- including France, Spain, and Italy --- undertook reforms that substantially relaxed legal constraints on the use of temporary employment contracts. Importantly, however, these reforms were often only partial in that the degree of employment protection granted to workers hired via permanent employment contracts remained unchanged, leading to a fundamentally dual labor market.Economic theory delivers ambiguous predictions on the effects of such partial reforms. A number of studies have noted that such policy changes could in principle generate higher overall employment and improved labor market efficiency or alternatively they could lead to a substitution of permanent contracts with rotating temporary contracts and little or no net gain in employment.In this dissertation, my coauthors Diego Daruich, Sabrina Di Addario and I use detailed Italian social security records matched with firm financial data and a difference-in-differences research design to provide a comprehensive empirical evaluation of an Italian partial reform signed into law in 2001. This reform facilitated the usage of temporary contracts, while maintaining existing employment protections for workers with permanent contracts. Longitudinal data on jobs, firms, and workers permit us to answer three fundamental questions on the impact of this policy change: (1) How did the reform affect overall employment and labor income? (2) What factors contributed to the success or failure of the law in raising employment and earnings? (3) Were there heterogeneous effects across different worker and firm groups?In Chapter 1 and 2, we show that, contrary to the stated intent of the law, the reform had little or no effect on aggregate employment, and led to a decline in average earnings. After the reform the Italian labor market became increasingly segmented: more workers were trapped in cycles of low-paid and fragile temporary jobs where the likelihood of transitioning from temporary to permanent jobs fell substantially. On the other hand, consistent with the intention of the law, average firm labor costs fell and mapped into significant increases in profits. The reform generated both winners and losers: its primary beneficiaries were firms, their shareholders and managers, as well as older incumbent workers. By contrast, the earnings of younger workers and new entrants were substantially depressed following the policy change and this widened the inter-cohort gaps in earnings among Italian workers. In Chapter 3, we abstract from the effect of the reform and focus on the economic forces behind the substantial gap in daily wages between permanent and temporary workers. Informed by the large underrepresentation of temporary contract workers within unions, we investigate the role of employers' pay policies and the lower bargaining power of temporary contract workers. Exploiting within-person daily wage changes for workers who transitioned from a temporary to a permanent contract within the same employer, we find that temporary workers received only 66\% of the rents traditionally shared by firms with workers employed under a permanent employment contract.This dissertation is structured as follows. In Chapter 1, we begin by explaining the Italian institutional background and the 2001 reform that facilitated the creation of temporary employment contracts by firms. We then present a theoretical model to guide our empirical analysis. Chapter 1 concludes by showing how the reform impacted the dynamics of job creation, duration and destruction using Italian social security data.In Chapter 2 we focus on the effects of the reform on the two fundamental actors operating in the labor market: firms and workers. A particular attention is devoted to analyze how the earnings profile of young workers have been affected, both in the short and in long run, by the introduction of the reform. Chapter 3 presents our rent sharing estimates that quantify to what extent temporary contract workers have lower bargaining power within the firm compared to permanent contract workers