Evolution of workers’ behaviour in dual labor markets

Abstract

The simultaneous increase in the use of temporary contracts and the productivity slowdown recently experienced in some OECD countries, fostered a growing interest in analysing the link between these phenomena. In this paper we study the effect of the use of temporary contracts on workers’ incentives and in particular we focus on effort decisions of temporary workers. We implement an agent-based model where workers interact in the labor market and compete for permanent contracts. Workers choose how much effort to exert in production and, using reinforcement learning, they update their strategies on the basis of past experience. The main result is that optimal effort strategies depend on the share of available permanent contracts. When the share is low, workers do not bet on their conversion and supply low effort. As the share increases workers exert higher effort but, when it is too high, they have the incentive to shirk since they are confident of being confirmed. Therefore, the relationship between the share of permanent contracts and workers’ effort, and consequently labor productivity, has an inverted-U-shape.