Labour contracts, wages and employment

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International Journal of Manpower

ISSN: 0143-7720

Article publication date: 23 October 2007



Altavilla, C., Mahy, B. and Rycx, F. (2007), "Labour contracts, wages and employment", International Journal of Manpower, Vol. 28 No. 7.



Emerald Group Publishing Limited

Copyright © 2007, Emerald Group Publishing Limited

Labour contracts, wages and employment

About the Guest Editors

Carlo Altavilla is Associate Professor of Economic Policy at the University of Naples Parthenope, Italy. His research interests are in the field of international monetary economics, labour economics and applied econometrics. Recent researches focus on the effect of heterogeneous inflation forecasts on unemployment dynamics and the effect of active labour market programs on employment and participation rate.

Benoît Mahy is Professor of Economics and Econometrics at the Warocqué School of Business and Economics (FWSE), University of Mons (UMH), Belgium. He leads the Labor Economics Analysis department and is a member of the Warocqué Research Center (CRW). His general research interests are in the field of labour economics and applied econometrics. They currently focus on the determination of labour demand, wages and labour productivity in relation to human resource practices, in particular employment contracts and training.

François Rycx (PhD in Economics) is Associate Professor at the Université Libre de Bruxelles (ULB). He is affiliated to the Department of Applied Economics of ULB (DULBEA) and a Research Fellow of the Institute for the Study of Labor (IZA) in Bonn. His current research is in the area of empirical labour economics, in particular the analysis of matched employer-employee data and the determinants of earnings inequality. He also researches on the economics of trade unions, income inequality and personnel economics.

Labour contracts, wages and employment

The 94th Applied Econometrics Association Conference was organised in Naples on 1-2 June 2006 with the specific aim of stimulating discussion on “Policies against Unemployment”. Various sessions have in particular focused on labour contracts, wages and employment. The collection of papers in this special issue, originally presented at the Conference, provides new evidence on this topic.

To reduce high unemployment encountered since the late seventies, most European countries have undertaken institutional shifts to favour employment through additional labour market flexibility. This option has been supported by the European Employment Taskforce (2003). Considering that “higher employment and productivity competitiveness, better wages and working conditions depend on the ability of enterprises and workers to innovate and adapt”, the taskforce suggests to associate “flexibility” and “security” on the labour market. Flexibility refers to:

  • adjusting standard, unlimited duration labour contracts;

  • the renewing of labour contracts to increase options for employers and employees to meet their needs;

  • removing obstacles to the setting-up and the development of temporary work agencies; and

  • promoting working time flexibility through additional attractiveness of part-time or temporary jobs.

Our purpose in this special issue is first to document two forms of employment that are characterised by rather flexible labour contracts, i.e. temporary agency work and part-time jobs. We then deal with self-employment, whose development is also considered as a potential stepping-stone from unemployment to employment. Finally, we address the problem of legal working time as a way to plan or redistribute employment, for example in the case of a business cycle downturn.

Temporary agency work

The level of labour market protection for temporary jobs has significantly decreased between the late 1980s and 2003 in most European countries (OECD, 2004). Reforms have mostly been designed to facilitate the use of fixed-term employment contracts and in particular temporary agency work. As a result, the incidence of temporary jobs has been increasing in Europe during the last 20 years, though this trend is far from homogeneous among all countries ( From a labour market perspective, the development of temporary jobs generates a reduction in total firing costs. Goux et al. (2001) show, for instance, that it is twice as costly in France to fire a worker on a permanent contract than on a fixed-term contract. Moreover, it is argued that lower firing costs are favourable for labour demand dynamics, through additional job destruction but also creation. Reduced firing costs would also make employment more sensitive to macroeconomic shocks during the business cycle (Bentolila and Saint Paul, 1992). Empirical results regarding the impact of more stringent labour market protection on employment are not totally clear-cut (Cahuc and Postel-Vinay, 2002; European Commission, 2004). This situation can be explained from a labour demand point of view. Temporary jobs can have a positive impact on labour demand through reduced firing costs and wages. Wages could be lower either if the return of accumulated experience from temporary jobs is smaller than from permanent jobs in a given firm or if a higher proportion of temporary jobs goes together with a younger population at work. The upward trend in the incidence of temporary or insecure jobs and the increased concentration of young workers in these jobs has been recently emphasised by DiPrete et al. (2006) on the basis of French data. Yet, the impact on labour demand of temporary jobs can also be negative if the latter are associated to lower human capital and productivity. According to Pfeffer (1998), permanent contracts, providing more job security, are required for training and information sharing inside firms. Moreover, Levine and Parkin (2002) point out that the return to training is bigger when the firm warrants job security.

In the first contribution of this special issue, de Graaf-Zijl and Berkhout (University of Amsterdam) examine the influence of the business cycle on the use of temporary agency workers in The Netherlands. This country leads the world in the use of agency workers (they accounted for 5 per cent of the total workforce in 2000). Among the countries censored by the OECD (2002), The Netherlands is also the country where temporary agency work represents by far the highest share of temporary jobs (almost 37 per cent in 1999). The authors first consider a cost-minimizing firm whose demand for temporary workers depends on relative productivities and wage and firing costs of agency and regular workers. Next, they enrich their model by including supply side issues, especially the fact that the supply of workers who are willing to work through a temporary work agency is counter-cyclical. The point is that workers generally prefer regular jobs that are more accessible in the case of business cycle expansion. Their empirical findings, based on a VAR model, show that temporary agency work leads gross domestic product (GDP) development. Moreover, they indicate that a positive GDP shock is followed by an increase in the use of agency work for two years, but decreased use in the three subsequent years.

Part-time employment

Part-time jobs are the second form of more flexible labour contracts considered in this special issue. These jobs accounted for around 18 per cent of total European employment in 2004 (European Commission, 2005) and are characterised by a rising trend in most European countries. It is also important to remember that the vast majority of part-time jobs are occupied by women in all countries. From a labour market point of view, part-time and more flexible working hour arrangements can favour both labour demand and supply. According to standard economic models, labour supply depends on many factors including the marital status (Lundberg and Pollak, 1996), the number of children, the existence of substitutes for childcare or homework, and the position in the lifecycle. Moreover, labour supply may be positive as long as working time can be freely chosen and that the market wage is higher than the reservation wage. Yet, when working time arrangements are imposed to the workers, the latter may prefer either not to supply labour at all or to accept the job as a second best. The European Commission (2005) mentions that around 20 per cent of part-time workers have not chosen their jobs on a voluntary basis, and that this share increased between 2000 and 2004. This can be an indication of this second best alternative, although involuntary part-time employment can also be related to inferior working conditions (see the paper of Allaart and Bellmann in this special issue). From a labour demand point of view, part-time jobs may have a positive impact on labour costs. Cassirer (2003), for instance, examining US data from 1970 to 1990, finds that occupational growth in part-time work has reduced labour costs. Moreover, her results offer greater support for demand- rather than supply-side explanations of part-time employment growth. Using a large representative survey of US establishments, Kalleberg et al. (2003) also provide evidence of cost-reduction and observe that flexible staffing arrangements (including part-time work) are more common in large establishments, seasonal industries and in establishments with highly female workforces. These findings are compatible with the positive impact estimated for Europe (European Commission, 2004) of the share of part-time jobs on employment, both in the short and long run.

Additional insights from part-time jobs on labour market outcomes are documented in this special issue. Allaart and Bellmann (Institute of Employment Research, Nuremberg) estimate and explain, from an original labour demand point of view, the difference in the incidence of part-time work observed between Germany and The Netherlands. They investigate three main reasons for an employer to introduce part-time jobs. The first one is the need for cheap and (sometimes) flexible labour, also called secondary workers strategy. The second motive is optimal staffing in order to avoid paying full-time workers for idle hours. The final reason is to meet the preferences of workers, also called accommodation strategy. Their empirical results show that the higher proportion of part-time jobs in The Netherlands is related to the industrial structure. The authors also stress that the three motives are relevant in both countries. However, they find a strong indication that the accommodation motive dominates especially in The Netherlands. German employers would thus be more reluctant to meet the preferences of their workers.

Economic theory advances a number of reasons for the existence of a wage gap between part-time and full-time workers. Empirical work has concentrated on the wage effects of part-time work for women. For men, much less empirical evidence exists, mainly because of lacking data. The third contribution in this special issue, by O’Dorchai, Plasman and Rycx (Université Libre de Bruxelles), therefore makes a valuable contribution, the more so given that (to the best of our knowledge) no cross-national comparison of men’s part-time wage penalty exists. The authors measure and analyse the wage gap between male part- and full-timers on the basis of the 1995 European Structure of Earnings Survey (ESES), an employer-employee matched database providing harmonised information on six European countries, i.e. Belgium, Denmark, Ireland, Italy, Spain, and the UK. Empirical findings show that the part-time wage gap fluctuates between 16 per cent in Spain and 149 per cent in Ireland. Further results suggest that policy initiatives to promote life-long learning and training are of great importance to help part-timers catch up. Moreover, for most countries, they highlight that a substantial fraction of the part-time wage penalty is due to occupational and professional segregation. Also noteworthy is that direct discrimination of part-time working men may no be excluded in some countries.


Self-employment can be seen as another type of flexible labour contract to stimulate employment. It represents 16 per cent of total employment in Europe (twice as much as in the USA) and remained quite stable since the late 1990s in relative terms (European Commission, 2005). Encouraging self-employment often implies to engage complementary public policies, such as tax policies favouring small businesses, start-up loans or subsidies for the creation of own jobs. The effects of brief self-employment experience on subsequent labour market outcomes have been examined recently by Bruce and Schuetze (2004). Using the US Panel Study of Income Dynamics, the authors find that, relative to continued wage employment, brief spells in self-employment do not increase (and probably reduce) average hourly earnings of those returning to wage employment. Their results also show that those who experience self-employment have difficulties returning to the wage sector. However, the authors emphasize that these consequences are small compared to similar experiences in unemployment. In sum, their findings suggest that self-employment may serve as a stepping-stone for the unemployed to find a job in the wage sector. Regarding latent entrepreneurship across countries, Blanchflower et al. (2001) point out that many people in the industrialised countries say that they would prefer to be self-employed. Poland, Portugal and the USA are at the top of their international ranking. In contrast, Norway, Denmark and Russia are found at lower end of their ranking. The authors also show that job satisfaction is significantly higher among the self-employed than among wage earners.

In this special issue, Andersson and Wadensjö (Stockholm University) use rich data covering all Swedish-born men aged 20 to 60 who lived in Sweden in 1998 in order to examine how the labour market status influences the:

  • probability of becoming self-employed in 1999 and 2002; and

  • economic outcome of self-employment in 2002.

The authors find that unemployed and inactive people have a higher probability of becoming self-employed as compared to wage earners. However, when wage earners become self-employed on average they enjoy a larger income and have a lower probability of being solo entrepreneurs. Moreover, results show that (former) unemployed and inactive people have a higher probability to exit self-employment and have a less favourable (exit) destination. These findings suggest that groups that enter self-employment from a weak position on the labour market are likely to be affected by this position for a long period. However, interestingly a positive correlation is found between the fact that an unemployed individual has received a start-up subsidy and his/her labour market performance. Yet, it is not clear whether this effect is really due to the subsidy (and the help of the employment office in starting the firm) or a selection effect among the candidates for self-employment.

Working-time regulation

Working-time regulation is another labour contract characteristic that may affect employment. In the long run, average annual working hours have been decreasing in the industrialised countries (Cahuc and Zylberberg, 2004). At given output, a first mechanical effect of working-time reduction is an increase of employment, in particular when the duration in the use of capital remains constant (Cahuc and Granier, 1997). This first positive effect is then most probably diminished by enhanced hourly labour productivity and duration use of capital. Without accompanying measures, this working time reduction may in turn change the output level through positive demand (consumption) and negative supply (additional costs) induced changes. Furthermore, a negative substitution effect towards capital inputs may also appear. Cahuc and Zylberberg (2004) further document these relations in the context of a minimising cost behaviour. They end up with the conclusion that a decrease in standard working hours has, as desired, a positive effect on employment when optimal hours worked are equal to standard working hours. However, things are different in the case of overtime. Reducing standard hours then decreases employment as it increases the hourly fixed costs of standard work (related to recruitment, training, etc. of employees) with respect to variable overtime costs, leading to a shift in the firm decision to employ less workers and to substitute them by additional overtime per employee.

The last paper in this special issue, by Altavilla, Garofalo (University of Naples Parthenope) and Vinci (University of Salerno), analyses the optimal length of working time with regards to the business cycle. More precisely, they examine how many hours per week workers in the USA and Germany should spend at their paying jobs. To address this question, they construct policymakers’ reaction functions capable of modelling the optimal length of working time as a function of the relevant labour market variables. Their study is based on a counterfactual policy experiment. Given a policymaker’s loss function and a structural model of the labour market, they define alternative specifications of reaction functions where the response coefficients indicate how policymakers should react to any news in the labour market in order to stabilize employment and wages. The authors also perform a comparative analysis on the ability of the rules to correspond to historical working-time records. Their results suggest that simple rules perform quite well and that the advantages obtained from adopting an optimal control-based rule are not so great. Moreover, their analysis emphasizes the success of the wage-based rule and of the employment-based rule in the USA and Germany, respectively. Finally, the authors propose a policy rule to capture the dynamics of the weekly working hours. According to their rule the length of the workweek is an inverse function of the deviation between the actual and potential employment level.


The Guest Editors are grateful to the Editor, Adrian Ziderman, for asking them to act as guest editors of this special issue. The collection of papers in this special issue was originally presented at the 94th Conference of the Applied Econometrics Association (AEA) held in Naples (Italy) on 1-2 June 2006. The Guest Editors would like to express their gratitude to the referees who did an excellent job in discussing the papers included in this volume.

Carlo Altavilla, Benoît Mahy, François RycxGuest Editors


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Further Reading

OECD (2005), Employment Outlook, OECD, Paris

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