The effects of contract-type mismatch and matching frictions on unemployment duration

October 12, 2022

In dual labor markets permanent contracts (PC) and temporary contracts (TC) coexist. These dual labor markets originate in reforms aimed at increasing labor market flexibility via a higher incidence of fixed-term contracts. Such reforms have become widespread in Europe and their impact on the performance of labor markets has attracted the attention of academics and policymakers. It has been stressed that temporary employment may provide stepping-stone effects to permanent employment and contribute to enhancing the employment chances of youth. However, it has also been noted that individuals may be trapped in temporary employment and precariousness, that employment levels are more volatile in flexible labor markets, and, more recently, that dual-labor markets may even lead to higher unemployment duration rates.

This paper investigates whether the co-existence of permanent and temporary contracts gives rise to a contract-type mismatch, as jobseekers prefer permanent contracts, whereas firms mainly offer temporary contracts.

The paper introduces a mismatch index that measures the degree of contract-type mismatch between declared contract-type preferences of jobseekers and jobs offered by firms (vacancies) at the job-center level. The first results is that among individuals finding a permanent contract, the hazard rate is highest in the absence of contract-type mismatch and lower for extreme values of the mismatch index, with the hazard rate reaching its lowest level when a full positive contract-type mismatch occurs (i.e., all jobseekers look for a permanent contract, while firms offer only temporary contracts). Second, local labor markets characterized by positive values of the contract-type mismatch index are associated with a higher incidence of exiting unemployment by accepting a temporary contract, as individuals may hedge their position against a low likelihood of finding a permanent contract. Finally, extreme values of the mismatch index are associated with a higher probability of finding a job by oneself, suggesting that in the presence of high contract-type mismatch individuals look for a job outside the job centers.

This work indicates that the Portuguese labor market is characterized by substantial contract-type mismatch, akin to matching frictions, and associated with longer average unemployment duration.Improving the desirability of temporary contracts and information about local contract-type mismatch rates may reduce matching frictions and average unemployment duration.

Click here to go to the paper by António Menezes and Dario Sciulli.


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