Labour Market Institutions and the Cyclical Dynamics of Employment

We present a dynamic labour demand model where we evaluate the impact of employment regulations on permanent and temporary employment. We consider three different kinds of regulations, namely firing costs, hiring costs and a constraint on temporary contracts. These regulations differently affect the size and composition of employment. The theoretical results are interpreted and questioned on the basis of empirical evidence on the employment effects of the regulation reforms that occurred in the major European countries in the period 1983–1999. The empirical analysis is based on a new set of time-varying indicators on permanent employment protection, fixed-term contracts and temporary agency work regulations. We find evidence in support of the hypothesis that fixed-term contracts have been effective stepping-stones to permanent jobs during the period under observation. On the contrary, flexible temporary agency work regulations seem to induce a substitution of permanent with temporary contracts.