Longer Temporary Contracts Unlikely to Create New Jobs

Under the coalition’s proposed reform package, firms would be allowed to employ workers on temporary contracts without an objective reason for up to 48 months – twice as long as permitted at present. Furthermore, it would be possible to extend temporary contracts up to six times, rather than the current maximum of three. Lastly, the reform would once again permit such contracts for workers who were previously employed by the same employer. Dr. Eduard Brüll, an economist at ZEW’s “Labour Markets and Social Insurance” Research Unit, provides his assessment:

“Extending the time cap on temporary contracts is unlikely to create many jobs; rather, it will make it more difficult to move into permanent employment. Extending the cap is often presented as a means of creating jobs. Yet the empirical evidence points in the opposite direction: allowing longer temporary contracts primarily affects the type of contracts employees are offered. The most likely outcome is a shift away from permanent contracts at the time of recruitment – without any significant increase in overall employment.

My research on a 2001 reform that, conversely, tightened the rules governing temporary contracts found that it encouraged firms to offer permanent positions, improved job stability for people starting their careers, and did not lead to job losses. Any relaxation of the rules is likely to have the opposite effect: more – and longer – temporary contracts, fewer permanent hires, and no significant increase in overall employment. International studies also show that reforms designed to liberalise temporary contracts while leaving dismissal protections for permanent positions unchanged typically increased the share of temporary employment rather than overall employment. Duration, in particular, is crucial. In the Netherlands, a reduction in the permitted cumulative duration of temporary contracts accelerated the transition to permanent employment; conversely, longer contract periods are likely to delay this transition.

The more likely outcome is a larger and more enduring temporary-employment segment, delayed transitions to permanent posts and weaker incentives for further training. The costs will be disproportionately borne by younger and less-qualified workers. 

Longer temporary contracts are therefore a flexibility tool. Some companies operating in project-based or uncertain environments will find them valuable. However, policymakers should not expect them to have positive employment effects. If the aim is to create more and better jobs, extending the maximum duration of temporary contracts without an objective reason is unlikely to achieve this on its own.”