First literature search: During the orientation process of the available literature, we were able to identify two ways of documenting the rights of employers and employees:
Single employment contract
Dual contract: permanent contract and fixed term contract
For employers and employees who want to document rights and agreements before entering into an employment relationship, is using dual contracts (permanent and fixed term) or the single employment contract more effective for wellbeing?
Key Words: fixed term contract, temporary work, single labour contract, single employment contract, dual contracts
Data Base: Since most of the literature used on single-employment contracts has been published by think tanks and centres of labour economics, a simple Google search strategy was used to locate it.
Quality of evidence and research gap
There have been reforms made to labour contracts in Spain, Italy and France that inch close to what a single-employment contract might look like but single-employment contract has not been implemented in its full form in any country. So empirical research on that subject is lacking. Scholars have examined the effect of implementing a single employment contract by developing theoretical models and simulations, which is a standard practice in the field of economics as many interventions are tested in this manner because implementing them requires national and political buy-in. In that sense, we are yet to understand the true effects of the single employment contract. Therefore, despite the evidence being of sound research design, keeping in line with our methodology of grading evidence, we grade the overall quality of evidence as low.
Note: Both interventions, dualism in the labour market and single-employment contract, have macro-economic ramifications such as productivity and growth. It is beyond the scope of this recommendation to explore these ramifications because they are not directly related to the well-being of the employer and employee. By limiting the analysis to the perspective of the employer and employee, we also intend on clearly identifying and highlighting the immediate impact of both interventions on the well-being of the employer and employee.
Dual contracts (Temporary and permanent Contract)
Single employment contract
As more employees transition from being into permanent employment, the cycle of employment to unemployment that employees experience when switching jobs will end for a large number of employees. “More employees will transition into permanent employment, there will be less churning (Eichhorst et al. 2018, p.45).”
The use of temporary contracts gives firms more choice in hiring employees in the long term. Short-term contracts allow firms to screen employees and examine whether they would like to employ them in the long term (Lepage-Saucier, Schleich and Wasmer 2013, p.12).
The introduction of the single labour market will reduce unemployment and job destruction. A model developed by Perez and Osuna by introducing a single employment contract for new/incoming employees in the Spanish labour market in the year 2012 shows that unemployment and job destruction will reduce by 31.5% and 35% (Perez and Osuna 2014, p.2). This brings down the duration of unemployment spells suffered by workers who swing back and forth between job and unemployment.
A model developed by Lepage-Saucier, Schleich and Wasmer (2013) shows that if temporary contracts are eliminated, employment levels will fall at a macro level. “The elimination of temporary contracts leads to a drop in total employment (by 7 percentage points in our quantitative exercise) and would require a very large reform of employment protection of permanent contracts in order to compensate for the loss of the temporary contracts as an instrument of ﬂexibility (e.g. a decline by two third of the cost of laying oﬀ workers) (p.8)”.
Employment related benefits will be distributed in a fair manner among all employees. Temporary workers are not entitled to a severance pay. Under the single employment contract, all employees will get a severance pay. The severance pay will increase with the seniority in the current job. (Lepage-Saucier, Schleich and Wasmer 2013, p.36).
Under dual contracts, permanent employees are well protected. Workers with permanent jobs develop stable working habits, their wages are relatively high, and they are highly protected (severance pay) in the case of a dismissal (Lepage-Saucier, Scheich and Wasmer 2013, p.26).
If all employees get a severance pay, the cost of dismissing all types of workers becomes the same for the firm. The firm cannot take advantage of a severance pay differential between permanent and temporary employees. This will in turn, smoothen the tenure of workers as “22.5% more workers could have tenures of more than three years and there could be 38.5% fewer one-year contracts’’ (Perez and Osuna 2014, p.3).
“Workers with a permanent contract, regardless of their individual characteristics or productivity levels, are much more likely to remain employed than temporary workers, as employers will choose not to renew temporary contracts when facing a bad shock’’ (Lepage-Saucier, Scheich and Wasmer 2013, p.26).
Employees have varying degrees of skill sets. Under dual contracts, firms cannot retain high-performing employees on temporary contracts and terminate permanent employees as it affects the morale of other permanent employees. Under single employment contract, since all workers have the same contract, terminating contracts of under performing employees is easier for firms. It will increase the productivity of firms (Lepage-Saucier, Schleich and Wasmer 2013, p.8).
Firms can change the size of the labour force in response to upheavals in the market by terminating contracts of employees who are under probationary periods. This is especially true for Contracts with Large Probationary Periods (Lepage-Saucier, Schleich and Wasmer 2013, p.26).
The Continuous Progressive Seniority Rights will eliminate discontinuities in the degree of employment protection as all employees will have minimum protection at the time of entering the firm (Lepage-Saucier, Schleich and Wasmer 2013, p.26).
Single employment contract decreases requirements for dismissal by expanding grounds on which the contract can be terminated. This is beneficial for employers as it gives them room to expand or reduce the labour force (Lepage-Saucier, Schleich and Wasmer 2013).
A model developed by introducing single-employment contract in the Spanish labour market prior to the Great Recession shows that consumption levels (consumer spending on health, education, goods and so on) of new workers increases by 1.7% as they did not experience long unemployment spells, they will have high entry wages and lower unemployment insurance tax (Dolado, Lale and Siassi 2015, p.4). The current generation of workers will witness an increase of 0.9% in their lifetime consumption. 87% of these workers stand to win, however the wins are distributed equally across different age groups. Prime age workers (18-54) gain by 1.3% whereas older workers (54-64), lose by the same magnitude. (Dolado, Lale and Siassi 2015, p.4 & 5).
“A single labour contract will reduce the complexity in the menu of contracts for employers. This is true only if it really replaces temporary contracts instead of creating a new one” (Lepage-Saucier, Scheich and Wasmer 2013, p.33).
Dual contracts (Temporary and permanent contract)
Single employment contract
Workers face employment volatility: Access to stable jobs is reduced and there is a recurrent spell of temporary jobs (Dolado, Lale and Siassi 2015, p.2). Empirical evidence shows that in some cases this is true and in some, not. Workers face volatility depending on where they are geographically situated. In countries with low firing costs on open ended contracts and a lower prevalence of fixed term contracts, fixed term contracts serve as stepping stones to permanent employment. Eg. Austria, Denmark, Germany, Sweden, the Netherlands, the UK or the US–, though even for these countries there are conflicting results. On the other hand, the evidence shows that the stepping stone hypothesis does not hold true in dual labor markets with high EPL gaps and a high FTC incidence –such as Italy and Spain (Bentolila, Dolado and Jimeno 2019, p.18).The transition rate (from temporary to permanent employment) in France is 10%, Spain is 12%, 12.3% in the Netherlands and 12.6% in Greece. The average rate of transition from temporary work to permanent work in European Union is 22.8%. Certain countries and sectors are marked by chains of fixed term contracts of the duration of 12 months (Eichhorst et al. 2018).Several countries such as Belgium, France, Hungary, Latvia and Lithuania offer temporary contracts of one to three months only. As a consequence, fixed term workers oscillate between temporary jobs and unemployment (Dolado, Lale and Siassi 2015).
A negative externality is that employers will increasingly use agency contracts/ training /apprenticeships contracts which are also precarious forms of employment, to avoid using single employment contracts (Lepage-Saucier, Schleich and Wasmer 2013, p.35).
Unskilled people, youngsters, immigrants are more likely to work on temporary contracts. The dual contract system “allows employers to discriminate between workers based on demographics or skills’’ (Lepage-Saucier, Schleich and Wasmer 2013, p.26) .
“The extended trial/probationary period reduces job security for employees. Incorporating new legal motives for dismissal into the single employment contract also has the same effect of reducing job security. This is equivalent to the job insecurity experience by employees under dual contracts’’ (Lepage-Saucier, Schleich and Wasmer 2013, p.32)
Workers in fixed term contracts have lower wages (Lepage-Saucier, Scheich and Wasmer 2013, p.26).
Given that fixed duration contracts are fairly well protected, unions are unlikely to support a single employment contract with a long probationary period as it reduces the protection offered to permanent employees ( Lepage-Saucier, Schleich and Wasmer 2013, p.36). This was observed in France.
Fixed term workers have low bargaining power: Workers on flexible contracts often lack voice. This is partly due to their weak labour market position, as a consequence of which many do not dare to raise their voice out of fear of losing their job. This may be due partly to the legal limitation of membership and/or voting rights for works councils to employees with a permanent contract and partly due to the fact that the interests of flexible workers are not (sufficiently) represented by trade unions (Eichhorst et al 2018, p.44).
The provision of increasing severance pay depending on seniority of the employee discourages professional mobility (Lepage-Saucier, Schleich and Wasmer 2013, p.62).
Temporary employees receive fewer opportunities for improving skills: Temporary employees are less likely eligible to receive skill enhancing training as employers will prefer to invest in skill enhancement of permanent employees (OECD 2019, p.41). For instance, a study based on the Survey of Adult Skills (collected by the OECD over 2008-2013 in 21 countries) reports that being on an FTC reduces the probability of receiving employer-sponsored training by 14% (Bentolila, Dolado and Jimeno 2019 p.19).
“To circumvent cost of lay-off, firms may induce quitting by bullying the employee. Firms may increase monitoring of workers to ensure that employees make an adequate level of effort which puts employees under psychological pressure.’’ (Lepage-Saucier, Schleich and Wasmer 2013, p.35).
Firms face high turnover setting off gains from flexibility: Temporary employees receive a low severance pay, if any. This leads workers to quit, as show my research conducted in France and Spain. A high rate of employees quitting nullifies gains from improved flexibility for the employer (Lepage-Saucier, Scheich, p.26).
Workers who are under a long probationary period will have challenges in accessing credit for housing as banks are likely to discriminate between the workers who are past the probationary period and workers who are still under their probationary period (Lepage-Saucier, Schleich and Wasmer 2013, p.30) .
Banks are less willing to grant temporary workers a loan in order to buy a house and landlords favour workers with permanent contracts making it more difficult for a temporary worker to rent a house or an apartment (Cahuc and Kramarz as cited in Lepage-Saucier, Schleich and Wasmer 2013) . For instance, Cahuc and Kramarz report that in France, young workers (between 20 and 35) are 4 to 8 percentage points more likely to live on their own and not with their family when they have a permanent contract as opposed to a temporary contract. At all ages above 30, there is a 10 to 15 percentage point difference in the home ownership rate between the two types of contracts, the rate being higher for permanent workers (Lepage-Saucier, Schleich and Wasmer 2013, p.30).
Abilities of employees under single-employment contracts will be questioned if their employment contract is terminated by the employer, as the expectation is for the employee to transition into permanent employment.If a worker under a Contract with Progressive Seniority Rights (CPSR) or with Long Probation Periods (CLPP), is laid-oﬀ, it is likely to send a negative signal in the absence of objective reasons: the termination of such a contract would be due to workers’ eﬀects such as lack of skill or motivation with certainty, not to ﬁrms’ eﬀects or the formal impossibility to go on with the contract. So workers will not receive the benefit of the doubt. Him/her being laid off will be considered to be a reflection of his motivation/skill set (Lepage-Saucier, Schleich and Wasmer 2013, p.33).
The usage of temporary contracts is increasing bringing down employment related benefits for a significant number of workers which can cause social unrest. Fixed Term Contracts are now not prevalent only among young workers, but they are also becoming more common among adult workers. When these workers reach pensionable age, it is unlikely that their labour history will meet the statutory requirements for a contributory pension, so that they will fall into much less generous assistance pensions. This development is bound to cause social unrest and a demand for higher non-contributory pension levels (Bentolila, Dolado and Jimeno 2019, p.30).
Employees under a single-employment contract may not receive skill-enhancement training. “Workers under temporary contracts are typically not trained as employers perceive them to be temporary workers so they don’t invest resources in training them. Workers under long probationary periods in single employment contract will not beneﬁt from more training under the current incentive system of training. Workers in a CPSR may have better access to training, but this remains to be demonstrated.’’ (Lepage-Saucier, Schleich and Wasmer 2013, p.32)
Dual employment contracts reduce efficiency because permanent employees become complacent knowing that they cannot lose their job and because the contract of fixed term employees cannot be terminated in advance, firms hire them at a lower entry wage. “Cahuc et al.’s (2016) model shows that dual EPL reduces efficiency. The reason is that when firing cost increases, the average productivity of workers on open-ended contracts increases. This is because firms retain open-ended jobs with lower productivity, i.e. standard labour hoarding. A higher firing cost also raises the duration of fixed term contract jobs, since firms face lower incentives to convert them into open-ended contract jobs due to the smaller surplus of the latter. As a result, in countries where fixed term jobs cannot be destroyed before they expire, they are kept more often, leading firms to pay positive wages to unproductive fixed term contract workers. This reduces their entry wage (which is not renegotiated) (Bentolila, Dolado and Jimeno 2019, p.18). Similarly, firms might lay off “good” temporary workers and not be able to lay off workers in permanent contracts that have a low productivity” (Lepage-Saucier, Schleich and Wasmer 2013, p.33).
The single employment contracts provides a high employment protection which scholars have shown to have a negative effect on productivity of the firm or industry. “Employment protection generally has distortive effects on capital accumulation and misallocation of productive units leading to lower productivity. Hopenhayn and Rogerson (1993) and Bertola (1994) find that productivity is lower because of a misallocation of employment in technologies, favouring less productive structures, leading to reduced incentives for capital accumulation. Bassanini et alii. empirically document the link between employment protection and productivity growth and find that EPL reduce productivity growth in industries where EPL are more likely to be binding’’ (as cited in Lepage-Saucier, Schleich and Wasmer 2013, p.34).
The stress of losing a permanent job is high for employees under a single employment contract. “Given that risk of layoff is lower but associated loss is higher, Postel-Vinay and Saint-Martin (2005), Clark and Postel-Vinay (2009), and Deloffre et Rioux (2004) showed that employees perceived their job to be less secure using the European Community Panel survey data’’ (Lepage-Saucier, Schleich and Wasmer 2013, p.35).
Because employees will transition into permanent employment, even if they are not satisfied with their job, they will continue working in that position instead of quitting. “Lower labour turnover leads to a mismatch effect leading to potential job dissatisfaction among employees” (Lepage-Saucier, Schleich and Wasmer 2013, p.35).
Dualism in the labour market has obvious and large disadvantages for employees. Employees on fixed term contracts or temporary contracts receive low wages and fewer employment related benefits such as pension and severance pay as compared to employees on permanent contracts.They are also subject to recurring spells of unemployment as they move from one employer to the other. They might face discrimination in the housing and loan market as financial institutions perceive them to have insecure and underpaid jobs. Given that the tenure of fixed term employees in the company is short, firms don’t provide them skill-enhancement training as a result, employees lose out on career advancement opportunities.
The single employment contract gives employees the opportunity to become permanent employees of the firm, an advantage not given under dualism. So a single-employment contract provides employees job security. Given that it provides a baseline/minimum level of advantages to employees at the time of entry, there is continuity in job-related benefits. As the level of benefits that employees will receive will increase as their tenure increases, employees the level of protection provided increases. The theoretical model developed by Garcia Perez and Osuna (2014) by calibrating the 2012 Spanish labour market shows that job tenure of workers will increase, unemployment will fall and rate of job destruction will fall.
However, this was a theoretical simulation where the authors controlled all parameters of the hypothetical reform of single employment contract. In practice, there is no clear indication of the level of baseline or floor of social protection benefits that single employment contracts offer. If the level of benefits provided is too low, then employees will face disadvantages similar to those that come with fixed-term contracts. In other words, the workers who are under a long probationary period and receive low protection while starting off will be stigmatised, just as workers who are under a temporary or fixed term contract. They will encounter challenges in accessing housing credit from banks as banks are likely to give preference to workers who are senior and are past the probationary period.
To address this problem, the design of the single-employment contract should be such that employees under probationary period should be able to climb up the ladder of the payscale and become permanent employees at a relatively swift pace. Similarly, new employees should also have a basic floor of rights (receive a minimum salary and other financial benefits) so that they don’t start at the very bottom. Employees under low seniority should also have the right to receive skill-enhancing training.
Tying the level of benefits to tenure also brings with it its own set of problems. It reduces mobility of the employee and encourages him or her to hold on to the job even when they are dissatisfied with it and would find it more beneficial to switch to a different company. On the other hand, it prevents employers from bringing in younger or more suitable persons. This issue can be resolved if the level of benefits is tied to the years of work experience that the employee has, instead of the completed tenure. Here, an employee can change jobs without the fear of losing out on the accrued benefits and the employer will also be able to maintain efficiency.
Another aspect of dualism is the concentration of unskilled persons, youngsters and women in temporary jobs or fixed term contracts. It is not yet clear how the single-employment contract would address this problem.
There is very little literature on costs and benefits to firms of the single-employment contract. So we cannot fully assess the impact of the single-employment contract on firms. Below is what we know.
For firms, the single-employment contract can act as a screening tool to retain high performing employees and let go of under-performing employees while they are on a probationary period. But for employees, that will lead to stigmatisation of workers who were laid off, as the common understanding in society would be that an employee on a single-employee contract should ideally progress to becoming a permanent employee.
Temporary contracts allow firms to adjust the size of the labour force to economic conditions (p.25). Single-employment contracts do not address this need of firms. If employees with low seniority rights or under probationary period are terminated, it breaks the implicit contract of long-term employment affecting the morale of other employees in the firm and can also lead to litigation. This leads us to conclude that perhaps the single-employment contract is more suitable for firms who intend on offering employees long term employment and is not suitable for firms whose requirements fluctuate tremendously along with changes in market conditions.
To conclude, dualism in the labour market is costly for both employers and employees. Having said that, scholars reason that the costs of dualism are still not well documented (Lepage-Saucier, Schleich and Wasmer 2013). The best way to tackle dualism in the labour market is an ongoing debate. The single-employment contract is a recent instrument suggested by economists and lawyers, the discussion of which is just taking off. It has not been implemented in its full form in any country. Researchers have arrived at advantages and disadvantages of the intervention by analysing them theoretically, by using simulations and by analysing reforms that come close to a single employment contract. So we don’t have a clear outline, design or conceptual and empirical understanding of this intervention either. Additionally, the literature on the single-employment contract has focused on evaluating its impact on employees. Very little is known about what costs and benefits it entails for employers.
Furthermore, dualism in the labour market and single-employment contracts are inter-linked with labour laws, social security benefits and macro-economy of a country. To understand the full impact of both these interventions, it is necessary to understand how both these interventions interact with them. This leads us to conclude that the desirable and undesirable outcomes of both are not completely understood by scholars and policy-makers alike. This limits the strength of our analysis.
Based on the evidence that we have, we conclude that the single-employment contract is preferable to dual contracts for employees. Given that little information exists of its impact on employers, we refrain from recommending it over dual contracts. However, to err on the side of caution, we believe that the effectiveness of the single-employment contract on the well-being of the employee is predicated on the design of the specific measure (level of protection in terms of notice period, severance pay and other employment related benefits provided to the employee) , interaction with labour markets, social security instruments and the socio-economic context.
The discussion in the balance of outcomes suggests that the single-employment contract has the potential to be more effective for the well-being of the employee as compared to having dual contracts. More research needs to be done on the costs and benefits for the employer of the single employment contract. Until then, it cannot be ascertained if one is preferred over the other.
Dual contracts and the single employment contract are topical topics in the field of economics and labour market legislation. To bring about changes in the contractual relationships between employees and employers, rules, regulations and laws in those countries also need to change. Therefore, this recommendation needs support from policy makers for it to materialise. But in the absence of support from policy makers, employers and practitioners can work towards crafting contracts that give all employees the chance to benefit from employment related benefits.
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