A study by the Vienna University of Economics and Business (WU) explores how involuntary temporary employment affects wage growth in Europe. The research examines how a mix of permanent and temporary workers impacts the economy, with a focus on wages.
Rise of Temporary Employment
Temporary jobs are increasingly common in Europe, offering companies more flexibility and lower costs compared to permanent roles. However, this trend has significant implications for wages. The study introduces the “competition effect,” where temporary workers reduce the bargaining power and wage growth of permanent workers.
The study analyzes data from 30 European countries from 2004 to 2017. It looks at how institutional frameworks and economic cycles influence wage growth. Using detailed worker-level data, the researchers focus on the competition effect by including involuntary temporary workers in the standard wage Phillips curve model.
The findings are clear: the presence of involuntary temporary workers lowers wage growth for permanent workers and overall. This effect is strongest in countries with weak wage bargaining systems. The competition effect might explain the slow wage growth after the 2008 Global Financial Crisis.
The study categorizes countries by trade union density (TUD), collective bargaining coverage (CBC), and wage bargaining coordination. The competition effect is strongest where TUD is low and weakest where TUD is high. Employment protection laws (EPL) have mixed effects: stricter EPL can boost bargaining power but also lead employers to hire more temporary workers.
Post-Crisis Wage Trends
After the 2008 crisis, the Phillips curve has flattened, meaning wages don’t rise as much with lower unemployment. The study looks at broader measures of labor market slack, including part-time and discouraged workers. Including temporary workers doesn’t fully explain this flattening, suggesting other factors are at play.
The study shows that labor market dualization—having both permanent and temporary workers—has important economic consequences. It challenges existing theories by highlighting how temporary employment negatively impacts wages. Policymakers should consider these findings when designing labor policies to address the effects of dualized labor markets.
Involuntary temporary employment is a key factor in Europe’s slow wage growth. The WU study provides strong evidence of the competition effect and calls for a rethinking of labor policies to address the challenges posed by a dualized labor market. Understanding these dynamics is crucial for promoting sustainable wage growth and economic stability in Europe.
