How much flexibility do we need ? Cristina

Short-term contracts have been deployed rapidly across Europe since the mid 90s. The objective of this paper is to investigate both theoretically and empirically the effects of short-term contracts on individual welfare. By comparing the economy pre and post-reforms, we study the evolution of firms’ and workers’ dynamics, we identify the determinants behind the firms’ decision to hire short-term, and we quantify the change in welfare for different categories of workers. We find that more productive workers fare better, while junior and less productive workers pay the cost of higher turnover and lower wages, confirming the presence of a dual economy. The study of potential policy interventions allows us to conclude that the longer the short-term contracts, the better the labor market outcomes. In addition, the comparison of the models pre and post-reforms with an American-style economy with a unique flexible contract, seems to suggest that flexibility has positive effects on the labor market for junior workers, but not necessarily on the one for senior workers.