The impact of temporary employment on productivity

Abstract

Recent papers in the economic literature emphasise that the use of temporary contracts (TE) could have a detrimental effect on productivity. However, there are different reasons to believe that the impact of TE might not be homogeneous across sectors. In this article, we study the impact of TE on productivity growth and, in particular, we wonder if it differs according to sectors’ skill intensity. Our data set is an industry-level panel of European countries that allows to divide sectors according to the skill intensity. Our main result is that TE has a negative impact on productivity growth, but it is more damaging in skilled sectors. While an increase of 10 percentage points of the share of TE in skilled sectors would decrease labour productivity growth of about 1–1.5%, in unskilled sectors the decrease would be of 0.5–0.8%. This result is robust to different skill intensity indexes and productivity measures, as well as to the sample composition. We also discuss policy implications of this result for labour market regulation.