The Life-Cycle Implications of Temporary Employment Contracts

Thu, 01 Jan 2026 00:00:00 +0000

Many countries, primarily in Europe, apply dismissal protections to permanent employment contracts but not to temporary ones, creating a two-tiered labor market in which younger and less educated workers disproportionately hold the precarious jobs; this paper asks what eliminating that second tier would do to output, employment and income, and how the answer differs across ages. Using Dutch data — the European Union Labour Force Survey for 2019 and the LISS household panel for 2008 to 2019 — the author documents that more than half of all transitions from unemployment into employment, at every age, are transitions into temporary contracts; that the annual rate of moving from employment to unemployment is higher in temporary contracts; and that, after controlling for worker and job characteristics, temporary workers earn about 5.8% less per hour and those who stay in temporary contracts experience about 1.5% lower annual growth in real per-hour income. She then builds a directed-search model with overlapping generations in which workers of differing age, human capital and education choose which job type to search for, accumulate human capital while employed, and can lose it during unemployment, and calibrates it to sixteen Dutch labor-market moments. In that model, abolishing firing costs raises the quarterly job-finding rate of the unemployed by roughly 13 percentage points but also raises job destruction by more, so the unemployment rate rises by 6.3 to 6.7 percentage points, average human capital falls by 9.2% to 10.4%, and GDP net of search and firing costs falls by 5.8% to 6.5% at the new steady state — a qualitative reversal of earlier structural results, which the author traces directly to the human capital channel: stripping human capital dynamics out of the same model restores the older finding that removing firing costs lowers unemployment and raises output. The effects are strongly age-dependent: average wages and consumption are higher for younger workers after the reform but lower from roughly age 40 to 45 onward, and the sign of the welfare verdict — a gain of 1.05% if protections do nothing for skill accumulation, a loss only if the probability of a human capital gain falls by around 20% — depends on an incentive effect the paper deliberately does not try to pin down.

Rosemary Kaiser | Macro Paper Warehouse

The Life-Cycle Implications of Temporary Employment Contracts