Heterogeneous paths to stability

Abstract

In this paper, we show that incentives to convert temporary contracts into permanent ones might be less effective when the employment protection legislation associated with temporary contracts is lax. Drawing upon rich administrative data and using a difference-in-differences methodology, we estimate that workers at their first work experience hired on more flexible contracts experience a reduction in the conversion rate to permanent employment of 6.3 percentage points after the implementation of the incentives (and of 3.2 percentage points over a year), compared to peers hired on more rigid contracts. This reduced conversion rate, which results in a 24% wage penalty even two years into their professional journey, points to a significant negative impact of flexible temporary jobs on the future prospects of young workers.

Keywords: temporary contracts, young workers, flexibility, institutional reforms, employment protection legislation.

JEL Classification: J41, J63, J64.