The availability of a flexible labour force might influence adjustment decisions regarding the rigid part of the labour force. To test this idea, we contrast the use of trainees (fixed-term contracts) and normal-contract workers (open-end contracts) when a reform made it more costly to use trainees. The results of our DID analysis indicate that the burden of adjustment shifts on trainees if they are present in the firm; if this buffer becomes less available, firms employing trainees see their average labour productivity decrease in the short run and their job destruction increase in the medium run. These effects seem to be increasing with firm size.
JEL: J23, J31
Keywords: fixed term contracts, difference in differences analysis, labour demand, job creation, firing costs.