The strict regulation of the German labour market is preventing many companies from creating permanent full-time positions.

In particular, the Employment Protection Act and worker participation in corporate decisions are proving to be the biggest hurdles, leading firms to rely on employees with fixed-term contracts, agency workers as well as freelancers and marginally employed part-time workers. This is the finding of a study by the Centre for European Economic Research (ZEW) in Mannheim.

The study, based on the findings of a survey carried out by the Institute for Employment Research (IAB) at the Federal Employment Agency, investigated what conditions make West German companies more likely to employ workers on temporary contracts, agency workers or freelancers. Economic theory offers a number of hypotheses, most of them based on the adjustment costs companies bear when they have to dismiss full-time employees on permanent contracts. The resulting costs are partially due to employment law, namely redundancy package rules, periods of notice or interventions from employee representatives. In order to avoid all of this, companies prefer to fall back on other forms of employment wherever possible.

These theoretical assumption have now been confirmed by the results of the ZEW study. To this end, the study examined the effects of the revision of the Employment Protection Act (EPA) in 1996 more closely. Whereas until that point the EPA did not apply to businesses with up to 5 employees, under the amended law businesses with up to 10 employees are no longer exempt. If redundancy costs resulting from the law were in fact that important, companies who no longer have to adhere to the EPA after the reform would be hiring less workers in atypical forms of employment, such as agency or temporary work or fixed-term contracts, than they did before the reform. Other firms who were unaffected by the reform would, meanwhile, show no change in their hiring practices.

This assumption was proven to be correct in the empirical analysis in the case of fixed-term employment. Companies who as of 1996 were no longer subject to the Employment Protection Act were less likely to offer fixed-term contracts than before the reform. There was, however, no such correlation in the case of freelancers or agency workers. Clearly, there is a much closer substitution relationship between permanent and fixed-term workers than between permanent workers and temporary workers or freelancers. The existence of employee representatives also increases the likelihood of a firm offering more fixed-term contracts. This is in line with the hypothesis that worker participation in corporate decisions increases the cost of dismissing permanent employees, thus creating an incentive for companies to offer more fixed-term contracts.

Contact

Dr. Bernhard Boockmann, E-mail: boockmann@zew.de

Prof. Dr. Tobias Hagen, E-mail: hagen@zew.de

Date

28.08.2001

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