The Value of Flexible Contracts: Evidence from an Italian Panel of Industrial Firms

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 25.01.2005, 12:15 - 13:30


Presentation by 

Piero Cipollone (Bank of Italy)


Fixed-term contracts have been used in many European countries to reduce firmsí firing costs. In this paper we evaluate the size of these costs by measuring firmsí willingness to trade fixed-term for open-end contracts in exchange for a cut in the labour cost of permanent jobs. Our results are based on a panel of Italian firms in the engineering sector exposed to an exogenous reduction in their labour cost induced by a tax credit granted to all firms hiring workers with open-end rather than fixed-term contracts. We found that firms do value the possibility of hiring one per cent of new workers with a fixed-term contract as much as a 2.1 (and up to 2.8) per cent cut in the labour cost of an open-end worker. In Italy, the share of fixed-term contracts among new hires grew from 34 to 42 per cent between 1995 and 2003. Using our most conservative results, we evaluate that the labour cost reduction associated with this expansion amounted to about 16 per cent.

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