Temporary Employment: A New Ugly Rearing its Head in Europe?

by Rebecca Wilder

Temporary Employment: A New Ugly Rearing its Head in Europe?

Last week Clive Crook opined on some fallacies of labor reform, specifically related to the unions and through the Spanish experience. Labor reform is a highly contentious subject, given its close ties to welfare and politics. Based on Clive Crook’s article, I delved into global temporary employment using OECD data and noticed two things: (1) not only is it too ‘simple-minded’ to attribute labor problems to one or two broad agents (unions, in the case of Europe), but it’s impossible to compare one country’s problem to another; and (2) other global economies – Ireland being the most worrisome candidate – saw respective shares of temporary employment surge in recent years. To me, this highlights the fact that known labor issues are just the beginning – new problems are surfacing that will require attention in the future.

As highlighted by Clive Crook via Bentolila, Dolado, and Jimeno (or the Vox version), the cyclical aspect of Spain’s two-tier labor market – the two tier system consists of a large share of temporary workers ‘outside’ the permanent employment positions – can explain in part the boom in employment during the bubble and its crash during the recession. But that doesn’t explain the experience of the US. In 2005 (the last measured date for the US), temporary workers accounted for just over 4% of employment compared to 33% in Spain; however, like that in Spain, the US unemployment doubled during the crisis. What’s one country’s problem is not necessarily another country’s structural issue.

In contrast to other key players in Europe, the Spanish rate of temporary employment fell 8.4 ppt since 2005, where most of the drop occurred in 2009 and 2010. The crisis eradicated some of the inefficiencies of Spanish temporary employment by consolidating those industries that tended to favor temporary employment during the bubble, construction for one. More worrisome, though, is the trend in temporary employment in other European markets. The rate of temporary employment increased 3.5 ppt, 3 ppt, and 5.7 ppt in Portugal, the Netherlands, and Ireland, respectively, spanning 2005-2010.

The problem with Spain’s two-tier labor market is well known, while that in Ireland and Portugal, for example, is emerging. The 2002 OECD Employment Outlook Chapter 3 outlines some adverse impacts of temporary employment. Temporary employment is associated with higher wage gaps among the temporary and permanent employees, fewer health benefits, negative effects on well-being for individuals and families, and minimal job security. I haven’t read recent research to this point; however, those countries with outsized surges in temporary employment – Ireland, Portugal, Netherlands, Italy, Greece, and the UK are among the highest in the sample above – are likely to experience a drop in welfare relative to other countries, all else equal.

Another interesting aspect of the Spanish labor market on a relative basis is that while Spain has a large presence of temporary workers, these workers do have a relative advantage relating to claim of unfair dismissal than do other global workers. The implication could be, that as the share of temporary workers rise in Ireland, Portugal, or the Netherlands, for example, the employment becomes more volatile and reduces expected lifetime income, hence spending or growth. (Data from the OECD.)

I’m worried and just conjecturing here. But, not only have countries not reformed labor issues already in the pipeline – the Spanish two-tier labor issues date back to 1984 – we’re creating new ones. The Great Recession and forced austerity is likely a very big factor in the surge in Irish temporary unemployment employment. This will bring with it unintended consequences that may require further reform (or alternative scenarios like exit from the EMU) at some point in the future

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