Flexible Labor Contracts, Firm-specific Pay, and Wages

We use matched employer–employee administrative data for the Netherlands to study the labor market effects of flexible employment contracts. Using an Abowd–Kramarz–Margolis (AKM) framework, we show that flexible contracts are associated with lower wages, a greater volatility of worked hours, and a higher probability of unemployment in the following year. However, our findings indicate that the disadvantages associated with flexible contracts arise not only from the contractual arrangement itself, but also from the types of firms in which flexible workers are employed. Specifically, workers on flexible contracts are disproportionately employed at lower-paying firms with lower firm-specific wage premiums. Furthermore, we find that flexible workers benefit less from employment at more profitable, larger, and financially safer firms, and that local labor market concentration amplifies their wage disadvantage. Overall, our findings imply that the negative effect of flexible contracts on wages may be overstated if the types of firms at which flexible workers are employed are not taken into account.