Reassessing Labour Market Reforms: Temporary Contracts as a Screening Device
I thank Salvador Ortigueira and Morten Ravn for their supervision. I am grateful to the editor Wouter den Haan and three anonymous referees for their excellent suggestions. I also thank Aurora Ascione, Andrew Benito, Giulio Fella, Mattias Hertweck, Lisa Lynch, Haroon Mumtaz, Chiara Rosazza Bondibene, Andrea Tesei and seminar participants at University College London for the Third PhD presentation meeting of the Royal Academic Society, Bank of England, Bank of Norway, Bank of Portugal, BI School of Management, European University Institute, IMT Lucca, University of Aarhus, Université Catholique de Louvain, Universidade Nova de Lisboa, University of Oslo and the Bristol Search and Matching inaugural conference for useful comments on the article.
The literature has warned against the risk that expanding temporary contracts might lead to segmented labour markets while failing to reduce unemployment. This article reports stylised facts suggesting that in most European countries temporary workers enjoy high rates of transition into permanent employment and presents empirical evidence showing that temporary contracts significantly decrease the unemployment rate. A matching model in which firms use temporary contracts to screen workers for permanent positions can successfully account for these facts. If separations are driven by learning about match quality, temporary contracts can revert part of the negative welfare effects generated by employment protection.