Research Economic Seminar: The Impact of Restricting Fixed-Term Contracts on Labor and Skill Demand – Evidence from Italian Online Job Vacancy Data

We study how increasing the relative cost of fixed-term contracts affects firms’ labor and skill demand. We exploit a 2018 Italian labor law reform, which increased the cost of fixed-term contracts while leaving that of permanent contracts unchanged, combined with rich data covering the near-universe of online job vacancies in Italy that allows us to characterize the demand for labor, human capital, and specific skill requirements under different contractual arrangements. Identification is based on a difference-in-differences research design, which exploits variation in firms’ exposure to the reform stemming from their heterogeneous reliance on fixed-term contracts due to varying reactions to earlier labor market reforms. We find that the increase in the cost of hiring temporary workers leads firms to substitute temporary with permanent prospective hires, but that it also leads them to require better signals of worker quality. Specifically, firms posting job ads for permanent positions look less for workers with low experience and more for workers with a college degree and social skills. Instead, firms posting job ads for temporary positions look more for workers with some experience and for workers possessing social skills. These findings suggest that restricting the use of temporary contracts by making them more expensive does not only promote permanent employment but also leads firms to increase their skill requirements for entry into jobs, thus reducing the employment opportunities of less qualified workers and potentially worsening the efficiency of job search and matching.