Centre for Employment Studies

Labor Market Flexibility in East and West Germany

Thomas Bauer, IZA, Bonn, University of Bonn and CEPR, London

Holger Bonin, IZA, Bonn, and University of Bonn

The paper describes differences in flexibility on the East and West German labor markets after unification. We first analyse the impact of internal adjustment costs on employment adjustment. Using a Nadiri-Rosen type dynamic adjustment model to estimate the speed of employment adjustment to the optimal level, we observe that higher employment flexibility in East Germany is mainly due to less rigid working hours, and a lower degree of unionization, whereas non-standard working contracts play a minor role. In a second part, the paper addresses regional differences in wage adjustment. Observation of individual wage growth after unification indicates that both the probability of nominal or real wage cuts and the extent of wage cuts might be substantially higher in the East. Again, the higher degree of flexibility could be the result of a more flexible use of working hours.

TEMPORARY JOBS: STEPPING STONES OR DEAD ENDS?

Alison L. Booth, ISER, University of Essex

Marco Francesconi, ISER, University of Essex

Jeff Frank, Royal Holloway College University of London

In Britain about 7% of male employees and 10% of female employees are in temporary jobs. In contrast to much of continental Europe - with stricter employment protection provisions - this proportion has been relatively stable over the 1990s.  Using data from the British Household Panel Survey, and informed by relevant theory relating to probation, sorting and human capital investment, we find that temporary workers report lower levels of job satisfaction, receive less work-related training, and are less well-paid than their counterparts in permanent employment.  However, there is some evidence that fixed-term contracts are a stepping stone to permanent work.  Women (but not men) who start in fixed-term employment and move to permanent jobs fully catch up to those who start in permanent jobs.    

Employment Protection

Christopher A. Pissarides, Centre for Economic Performnace London School of Economics and CEPR

Employment protection legislation is generally blamed for reducing labour turnover and increasing the duration of unemployment. This paper argues that a proper evaluation of employment protection requires a model where there is need for it. The model in this paper gives an insurance role to employment protection in the absence of perfect insurance markets. It is shown that there is a role for both severance payments and advance notice of termination and that if they are cho-sen optimally, exogenous unemployment insurance does not influence equilibrium employment. Simulations show that if employment protection is chosen optimally it does not reduce job creation when compared to an equilibrium without it.

Fixed Term Contracts, Social Security Rebates and Job creation: the Case of Italy

Lia Pacelli , University of Turin, University College London and LABORatorio R.Revelli

This work is part of an ongoing project aiming at analysing labour demand determinants and constraints in the Italian labour market. It investigates the role labour market institutions play in the adjustment process, focusing on “on the job training” contracts. Italian labour market is an interesting case-study because it is commonly considered a highly regulated market. Contrary to this widely accepted idea, some works present evidence of flexibility higher than expected. Are institutional constraints binding on human resources management at the firm level? We are particularly interested in firing costs imposed by employment protection legislation. To answer this question it is useful to focus on the use of “on the job training” contracts, i.e. of temporary and “cheaper” contracts that can be used in Italy to employ young workers. And it is useful to contrast trainees (i.e. workers hired with an “on the job training” contract) and “normal workers”, i.e. those hired with an open-end contract. This because the availability of relatively more flexible labour force (trainees) might influence adjustment decisions regarding the relatively more rigid part of the labour force (“normal workers”). An interesting aspect of “on the job training” contracts being that the law regulating them changed significantly during our observation period, providing a sort of natural experiment on the impact training contracts have on the adjustment process at the firm level. Preliminary evidence shows that trainees tend to be the buffer of the labour force, i.e. the burden of adjustment shifts on trainees if they are present in the firm. Furthermore, if this buffer becomes less available (i.e. more costly), firms employing trainees see their average productivity of labour decrease in the short run and their job destruction increase in the medium run.