The impact of temporary employment and employment protection on labour productivity: evidence from an industry-level panel of EU countries

Abstract

In recent years the availability of new industrylevel data allowed to evaluate the impact of labour market policies more consistently than previous standard crosscountry studies. In this paper an industry-level panel is exploited to evaluate the impact of Employment Protection Legislation (EPL) for temporary employment (TE), along with permanent employment (PE), in EU countries. Indeed, the advantage of using industry-level data is manifold. The method exploits both cross-country variation in EPL for PE and TE and variation in the relevance of EPL in different industries deriving from a particular diff-in-diff assumption. Differently from the previous literature we apply this idea of the different binding of EPL only for PE, whereas we implement a different strategy for TE which should imply a more accurate identification of the effect of the use of TE on labour productivity. The theoretical literature has not established a clear prediction on the sign of the effects, existing different convincing reasons for both directions. Thus, the results of the analysis have potentially important policy implications. Our main finding is that the use of temporary contracts has a negative, even if small in magnitude, effect on labour productivity. Furthermore, the analysis confirms that EPL for regular contracts reduce labour productivity growth more in those industries requiring a greater employment reallocation.The author would like to thank Stephen Machin, Roberto Cellini, Sergio Destefanis, two anonymous referees and participants in various conferences and seminars for helpful comments and suggestions. However, the analysis and errors remain responsibility of the author alone.

The impact of temporary employment on productivity

“…For instance, Auer et al (2005) find a positive relationship between job tenure and labour productivity. Similarly, in a panel of EU countries Lisi (2013) finds that an increase of the share of flexible jobs would lead to a decrease in labour productivity growth, even after controlling for the potential endogeneity of TE in the productivity equation.…”

“…In our empirical analysis, we modify earlier productivity equations in the literature (Bassanini and Venn 2008;Bassanini et al 2009;Lucidi and Kleinknecht 2010;Lisi 2013), adapting the model to estimate the differential impact of TE across sectors. Our starting point is that the impact of TE on productivity might not be homogenous across sectors and, in particular, we wonder if the effect differs according to sectors' skill intensity.…”

“…8 More specifically, the underlying assumption usually specified in the literature is (Bassanini et al 2009;Cingano et al 2010;Lisi 2013):…”

“…By contrast, in industries where changes are less frequent or where firms can reallocate labour through internal adjustments, EPL could be expected to have little impact on reallocation and, in turn, on productivity ...". 8 To obtain the frictionless job reallocation rate FJRj for each sector, we follow the method developed by Ciccone and Papaioannou (2006) and, then, employed by different previous studies in this literature (e. g., Cingano et al 2010;Lisi 2013). In particular, we regress the actual job reallocation rates at industry level on industry dummies j , industry dummies interacted with the EPL index for PE j EPL it and country-time dummies # it :…”

“…The recent flexibility reforms had been introduced with the aim of removing labour market rigidities, which in the supply-side thinking (see e. g., OECD 1999OECD , 2003IMF 2007) were seen as the main cause of stagnant labour markets, under the implicit assumption that more flexible conditions for workers would not affect innovative capacity and productivity growth (Vergeer and Kleinknecht 2014). In this regard, however, most recent papers studying the role of TE in different European countries, and employing different empirical approach, find a negative and significant impact of TE on innovation and productivity (Ortega and Marchante 2010;Cappellari et al 2012;Lisi 2013;Kleinknecht et al 2014). Furthermore, the recent macro stylized-facts and, principally, the growthless job creation condition have drawn even more attention on the impact of flexibility reforms on productivity (Boeri and Garibaldi 2007;OECD 2007).…”