Flexible Wage Contracts, Temporary Jobs, and Firm Performance: Evidence From Italian Firms

Abstract

This study focuses on the effects of decentralized wage schemes and temporary forms of employment on firm performance. The effect of monetary incentives on workers' effort and firm performance is a central topic in economics. According to the principal-agent paradigm, firms (the principal) have to link employees' remuneration schemes to any verifiable indicator of performance to avoid opportunistic behavior. The empirical evidence shows that financial incentives have the potential to exert strong effects on indicators of firm performance, such as productivity and worker absenteeism, although the degree of effectiveness of such schemes varies significantly according to the institutional/economic context in which firms operate. From both a theoretical and empirical point of view, the prediction on the effects of temporary types of employment on effort and productivity is less neat. In light of these considerations, this study uses a sample of Italian firms to provide further empirical evidence on whether and to what extent performance-related pay schemes and contract flexibility affect workers' effort (in terms of absenteeism) and, in turn, firm productivity. These effects are analyzed for different types of workers (white collar vs. blue collar), working in workplaces characterized by a different degree of uncertainty and risk and in firms operating in different economic and institutional settings. Our results show that wage flexibility has a significant effect on effort and then on firm's productivity and that white-collar workers are more responsive to monetary incentives than blue-collar workers. Moreover, the presence of a large share of temporary contracts, implying a lower dismissal probability for permanent workers and a deterioration of the working environment, appears to reduce workers' motivation and effort.

Fixed term contracts and employers' human capital: The role of educational spillovers

“…A number of studies show a negative relationship between the use of temporary work arrangements and the evolution of productivity in European countries since the mid 1990s (Michie and Sheenen ; Boeri and Garibaldi ; Dolado and Stucchi ; Bassanini et al ). This evidence supports the view that the diffusion of flexible staff arrangements, which are required by firms operating in a changing and uncertain economic environment, may foster poor‐quality human resource management (HRM) practices (Battisti and Vallanti ; Damiani et al ). The use of fixed term contracts may hurt skills accumulation (Burgess et al ), workers' involvement and co‐operative relationships in the workplace, leading to inefficient organization of internal labour markets and contributing to the slowdown in productivity growth (Blanchard and Landier ; Kleinknecht et al ; Belot et al ).…”

Temporary Employment, Demand Volatility and Unions: Firm-Level Evidence

“…Attention has been paid mainly to the alleged beneficial impacts in terms of unemployment reduction, especially for young workers (OECD, 2008), as well as the potential negative effects for the welfare of workers (Booth et al, 2002;Blanchard and Landier, 2002;Boeri, 2012) and labor productivity (Battisti and Vallanti, 2013;Cappellari et al, 2012;.…”

Internal and external equity in compensation systems, organizational absenteeism and the role of explained inequalities

“…The questionnaire was sent to the HR manager or to the owner of each company by the local associations of Confindustria (which is organized alongside administrative grouping at the province level), which then collected the replies and sent them to the central Confindustria research unit. The Research Department of Confindustria checked the quality of the data for each questionnaire in terms of consistency of the information collected and then elaborated the results and released a descriptive report (Confindustria, 2010; see also Battisti and Vallanti, 2013 for the description of the Confindustria survey).…”