Flexible labor markets are generally seen as a good thing in times of upheaval, and many European economies spent the period between 1990 and 2010 attempting to make their economies more flexible.  This typically involved making it easier to fire permanent employees and encouraging the use of more temporary contracts.

New research, from the University of Cambridge, highlights how these reforms were based on the belief that the inflexibility of the labor market was contributing to the unemployment problems faced in various economies around the world.  The study explores the labor market in eleven European countries between 1988 and 2012.

“The cut in dismissal costs was more than half with respect to that stipulated by legislation in the 1980s, both in terms of days worked per year that are paid and in terms of the cut-off figure of monthly salaries that are paid,” the researchers say.

The researchers wanted to understand what impact the reduced levels of employment protection was having both on total employment but also on the breakdown between permanent and temporary employment.

The results appear quite clear, in that attempts to make it easier to dismiss people had no apparent impact on overall employment rate.  The data suggests that temporary contracts have simply replaced permanent contracts, with no overall change in total employment, which is only bolstered by economic growth.

Restructuring employment

This apparent restructuring of employment was the clearest effect of the reforms, such that the researchers believe we can now clearly talk of two categories of workers: those on fixed/permanent contracts, and those on temporary contracts.  Indeed, so distinct are these forms of work that they almost act as two distinct job markets, with little crossover from one to the other.

The researchers believe that the reforms have been profound, with any benefits accruing from them largely going to employers rather than employees.  Indeed, they believe that the labor market is now too far weighted towards temporary work, with most of the work created after the economic crisis being of a temporary nature.

These new jobs are structurally volatile, with many falling by the wayside whenever the economy encounters blips, with the researchers highlighting that these fragile jobs have been among the first to go during the covid pandemic.  They caution that our economic systems are simply not structured to cope with sudden unemployment that they believe could reach up to 30%.

With the pandemic providing such disruption to business as usual, the researchers believe this could be a perfect opportunity to reset, and take a different approach.

“Within the short to medium term, countries will probably start to rethink this problem of employment legislation more seriously and to consider the fact that these measures implemented in the past have not had the desired effects and that we have to go for models in which an attempt is made to stabilise employment much more,” they conclude.