Early Draft: Do Not Cite Without Permission from the Authors

Early draft: Do not cite without permission from the authors

Regulation of fixed-term employment and the long-term risks of temporary employment in Norway and Sweden

Jørgen Svalund, Fafo.

Tomas Berglund, Department of Sociology and Work Science, University of Gothenburg

Abstract:

In this paper we study long term risks of temporary employment, i.e. if temporary employed are found in a marginalized position after five years. A marginalized position is indicated by three factors: that they are not in employment, that they are unemployed, or that they receive social benefits five years later. Temporary employees are compared with permanent employees, as well as unemployed. While such effects are important in it self, the main goal of this paper is to compare results from the Norwegian and the Swedish labour market, thus studying whether differences in employment regulation in these countries may influence the possibilities of later labour market integration.

We find some support for a hypothesis stating that temporary employment may work as a stepping stone in comparison to unemployed. However, we also find that the risks of marginalization that a temporary employed are exposed for, are severe and very significant in the long-term. Moreover, the Swedish labour market, compared to the Norwegian, are more riskfull, at least for the risk of unemployment among temporary employed.

Introduction

The strength of the employment protection regulation, restrictions on employers opportunities to dismiss permanent employees as well as employing on temporary contracts, affects labour market mobility and workers' opportunities to find jobs (OECD, 1994; Gangl, 2003; Bentolila and Bertola, 1990). After a period when partial deregulation of employment protection legislation (EPL), mainly temporary work, was commended by the OECD (1994) and was widely applied, the OECD has eventually taken a more nuanced, or critical, view of the benefits and costs of fixed-term employment, warning against the risk of ‘lock in’ in precarious positions and increased labour market dualization, especially when liberal legislation for temporary employees is combined with strict employment protection for permanent workers – a combination more characterizing Sweden than Norway (OECD, 2013). At the same time the EU is advocating “structural reform” of labour markets as a key to escape the European job crisis, placing the issue of labour market deregulation and the merits of fixed-term employment at the center of international labour market policy debates.

Norway and Sweden, as the other Nordic countries, are small, open economies who both put emphasis on mobility and adjustment in the labour market, proscribing a dynamic interplay between market competition, solidaristic wage policies, and active labour market policies. While sharing common characteristics regarding labour market governance, Norway and Sweden have rather different regulations and legislations concerning employment protection. While Sweden has a strict regulation of permanent employment contracts, Norway has a medium strict regulation of permanent contracts. While Swedish regulations of fixed-term employment are among the most liberal in Europe, the Norwegian are among the strictest. Thus fixed-term employment accounts for twice as high a share of jobs in Sweden (16%) as in Norway (8%). Temporary contracts is a rather typical form of employment for new entrants in these labour market; among Swedish employees aged 15-24 more than half are temporarily employed and in Norway the share is almost one fourth.

A strong employment protection legislation on permanent employment contracts may cause employers to be more cautious about the decision to hire more employees (Gash, 2008). Instead of hiring employees on permanent, open ended contracts they may turn to temporary contracts or work agencies. A high level of protection of permanent employees will increase employer’s incentive to offer temporary employment contracts, as a way to reduce the risk of cost in case of firings. Even so, the possibility for the employers to offer such contracts are a matter of policy and labour market regulation on the national level. Critics argue that liberalization of the regulation of temporary contracts primarily leads to more temporary and fewer permanent positions, which again can lead to greater labour market inequality and dualization where many temporary jobs do not provide possibilities for mobility into positions with more stability and higher job security (Gash, 2008; Giesecke and Groß, 2003; Booth et al., 2002). Further, previous research does not suggest that easier access to the use of temporary contracts increases the overall employment level (Boeri and Garibaldi, 2007; Kahn, 2010; OECD, 2013).

With otherwise very similar labour market regimes, this study provides a unique opportunity for comparative analysis of how differences in regulative conditions affect the supposed function of fixed-term employment as a stepping-stone into stable employment. Assuming that an increase in fixed-term employment, ceteris paribus, opens more job and training opportunities for new entrants and disadvantaged job seekers, but also reduces the share of permanent jobs available, the key question is whether, and under what conditions, liberalization of fixed-term employment increase or decrease transition flows into employment and unemployment for temporary employees, for the primary target groups, for other groups of job-seekers. While some suggest that liberal rules regulating temporary employment to a larger degree integrate individuals in the labour market, other suggest that temporary jobs are dead ends, merely creating insecure short term jobs which do not lead into stable jobs, but where the individuals move between insecure jobs and unemployment. The basic objective of this paper is to investigate whether, and under what preconditions, a temporary job end in a higher risk of not being employed, beeing unemployed or receiving social benefits, thus not lead to firm establishment in the Norwegian and Swedish labour markets. Are the effects of fixed term employment on labour market establishment the same in Norway and Sweden, or is the risk of ending up in a marginalised position higher for fixed-term employees in any of the countries? Do the liberal Swedish rules of temporary employment imply that unemployed will have an easier time becoming employed?

The research questions will be studied with the aid of data from the Labour Force Surveys (LFS) for the period 2000-2008, linked with register based data on employment, unemployment and social benefit receiption five years later. The LFS contain detailed information on adults and their labour-market status. To study the probability for labour market marginalisation and segmentation in the longer term, we combine information on the individuals employment status in the LFS at one point in time with registry data on employment, unemployment and social security reception five years after the LFS participation. We further use register data from for two years prior to the LFS participation to control for differences between unemployed, permanent and temporary employees, prior to the LFS participation. We thus use two seven-year-long panels with registry data and LFS data for each cohort.

The following section describes theory and previous research, before the institutional framework relevant to the research question is presented. Then we present data and analytical strategy, before we describe the results. Finally, the results are discussed and the paper is concluded.

Analytical framework

A central issue in studies of temporary employment is whether temporary contracts function as a bridge from marginal labour market positions to more stable positions, integrating temporary workers into the labour market, or if it function as a trap that lead into uncertain labour market position with the prospect of new temporary jobs, unemployment, or exit from the labour market, thus segmenting the labour market into secure and insecure positions.

From an integration perspective it can be expected that temporary employment increases individuals probability for employment over time. Theories relating to employers’ behavior when recruiting, and workers' behavior when searching for jobs, are central in order to grasp the consequences of temporary contracts. It is difficult for employers to get full insight into the job applicants motivation and learning capabilities. Further, staffing decisions are made under time strain, as employers sometimes need to hire workers fast, and as thoroughness and interviewing a number of applicants in several rounds requires resources. One assumption is therefore that temporary employment is used to screen job candidates, and that some temporary contracts is used as a form of probation (Gash, 2008: 652; Houseman, 2001).

When the job security of permanent employees is high due to employment protection legislation, employers will tend to employ those who, via formal education or other traits, signals high productivity (Giesecke and Groß, 2003: 162). From the employees point of view a temporary contract can, according to human capital theory (Becker, 1975), act as a bridge into firmer labour market attachment, as the employee, holding a temporary job rather than being unemployed, preserve or increase their human capital. In addition, the temporary employee acquire job references. Other employers can then later more easily evaluate the employee on issues that are difficult to assess using formal educational papers. A temporary job can thus help reduce the potential uncertainty future employers may experience during subsequent job applications. But it can also have a scarring (stigma) effect, as employers may wonder why the job seeker did hold a temporary rather than a permanent job(Yu, 2012) Work experience in the form of a temporary job can also build networks which can provide access to more available jobs (McVicar et al., 2016; Granovetter, 1995).

If temporary contracts do integrate individuals into the labour market the probability of finding a temporary or permanent job after a fixed-term contract should be higher than the probability of becoming unemployed (Giesecke and Groß, 2003: 163). Earlier research from the US labour market has shown that marginalized groups, young people with low education and immigrants to a lesser degree are employed in labour markets (states) with a strong employment protection legislation. It is thus reasonable to assume that temporary positions will help to integrate groups who have lower employment rates than others, especially in the long run.

In a more pessimistic perspective temporary contracts is assumed to lead to labour market segmentation (Doeringer and Piore, 1971). Within such a perspective the labour market consists of a primary labour market with secure, stable jobs, and a secondary labour market where there are lower pay and worse working conditions, and with limited opportunities for mobility into the primary labour market. Human capital theory (Becker, 1975) supports the notion that temporary employment can lead to segmentation. The knowledge that a worker uses in his work, the human capital, can be divided into two main types. General knowledge which is acquired through various forms of education and which can be used in most or at least a number of different companies, and specific knowledge developed in and for specific tasks in specific jobs. Theoretically it can be assumed that individuals are investing in their general human capital if the increase in their expected lifetime earnings is equal to or greater than the investment cost. Therefore, it is common to invest in human capital prior to or at the beginning of one’s career, when the probability of getting a return on the investment is high. Specific human capital is company specific and is much more likely to be paid for by the employer. The employer want to get return on his investment by trying to induce the employee to stay in the company (Engelstad, 2001: 113). The employers may try to maximize numerical flexibility among categories of workers that the employers are less dependent on. If the legislation allow this strategy – either by very lax overall EPL, or by liberal legislation for the use of temporary contracts – segmentation is predicted to take place.

There is research that supports both that temporary employees are integrated into the labour market, and that it leads to labour market segmentation. Nergaard (2016; 2004) find that most temporary employees hold a permanent contract within a two year period in Norway. Engebretsen et al. (2012) compares the probability of making a transition into a permanent contract for temporary employees and those unemployed in Norway. They found that workers who had a temporary position, especially young people with elementary school as their highest education, faster than comparable unemployed moved into a permanent job. Folkvord (2015: 69) found that the temporary employees with higher education (master degree or more) to a lower extent than those with less education move into permanent employment within seven quarters in Norway.

There is also research indicating that temporary employment and segmentation is interrelated. Håkansson (2001) and Levin (1998), who both studied Sweden in the 1990s, found that temporary workers had a higher risk of being unemployed two years later, compared with permanent employees, but lower risk than those who were unemployed. Both Giesecke and Groß (2003), who studied in Germany, and Scherer (2004), who studied West Germany, Great Britain and Italy, found that temporary workers had a higher probability of being unemployed than permanent employees later on. Mooi-Reci and Dekker (2015) found that temporary employees, compared to permanent employees, were experiencing a higher risk of future unemployment compared with permanent employees in the Netherlands. Further, temporary employees did not have shorter periods of unemployment compared to permanent employees, and the study did not suggest that temporary employment reduces the length of the unemployment spells. Thus, temporary employment may have a positive short-term effect which can end, for some, in recurring periods of unemployment.

Regulatory and labour market differences between Norway and Sweden

Employers’ motivations regarding the use of fixed term employment may vary with their institutional environments. The use of fixed-term employment can be expected to be more important for employers in countries where the regulation of permanent contracts is strict, compared to countries where it is lax (Shire et al., 2009; Olsen and Kalleberg, 2004). While a rather strict regulation of both permanent and temporary jobs, a balanced model, as in Norway, restrain the use of temporary jobs, mixed models combining strict rules for permanent jobs with lax rules for temporary jobs, as in Sweden, have been introduced in many countries to achieve more labour market flexibility. But such a model may also increase labour market segmentation, with a shrinking core of well protected employees, and a growing share of workers stuck in unsecure fixed term employment (Booth et al., 2002; Palier and Thelen, 2010; Polavieja, 2006; OECD, 2013). Thus, the incidence of fixed term employment, employers’ strategies regarding the use of fixed term employment, and the pathways from fixed term employment into more stable labour market positions are contingent upon the entire configuration of employment protection legislation and the interaction between rules for open-ended jobs and fixed-term jobs in particular.