Fixed-term contracts and firm productivity: Do workers’ skills and firm conversion rates from fixed-term to permanent contracts matter?

• Date: 05 November 2024
• Pages: 144-161
• DOI: https://doi.org/10.1108/IJM-03-2024-0194
• Published date: 05 November 2024
• Subject Matter: Economics,Labour economics
• Author: Ngoc Hân Nguyen,Wendy Smits,Mark Vancauteren

Fixed-term contracts and firm

productivity: Do workers’ skills

and firm conversion rates from

fixed-term to permanent

contracts matter?

Ngoc H^

an Nguyen

University of Groningen, Groningen, The Netherlands and

University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam

Wendy Smits

Maastricht University, Maastricht, The Netherlands and

Statistics Netherlands, Heerlen, The Netherlands, and

Mark Vancauteren

Hasselt University, Diepenbeek, Belgium and

Statistics Netherlands, Heerlen, The Netherlands

Abstract

Purpose –We aim to elucidate the relationship between fixed-term employment and firm productivity

by examining workers’ skills and considering how firm-level conversion rates influence this

relationship.

Design/methodology/approach –We use longitudinal employer-employee data between 2011 and 2017 in

the Netherlands to estimate a nonlinear regression derived from a production function proposed by Addessi

(2014) and Castellani et al. (2020).

Findings –The contribution of fixed-term contracts to firm-level productivity is less than that of permanent

contracts. However, this contribution is greater when firms exhibit a high conversion rate from fixed-term to

permanent positions. The effect of the conversion rate is more substantial for high-skilled fixed-term workers

than for low-skilled ones.

Originality/value –Our results suggest the extent to which firms benefit from fixed-term contracts when

these are used for screening high-skilled workers for permanent employment.

Keywords Productivity, Firm-level TFP, Labour contracts, Screening, Conversion rate, Worker skills,

Panel data

Paper type Research paper

IJM

45,10

144

© Ngoc H^

an Nguyen, Wendy Smits and Mark Vancauteren. Published by Emerald Publishing Limited.

This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may

reproduce, distribute, translate and create derivative works of this article (for both commercial and non-

commercial purposes), subject to full attribution to the original publication and authors. The full terms

of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

We sincerely thank William Addessi and Giulia Lotti for their answers to our questions about the

production function estimation in their papers. We would like to thank Bart Leten, Ren�

e Belderbos, Keld

Laursen, and Sabien Dobbelaere for their valuable comments on earlier versions of the paper. We are

grateful for the constructive comments received from the editors and anonymous reviewers of our

paper. We would like to thank Jannes de Vries from Statistics Netherlands for his help with preparing

the raw data files. We would also like to thank participants at seminars and conferences for their

insightful comments and suggestions on our paper.

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/0143-7720.htm

Received 17 March 2024

Revised 8 August 2024

Accepted21 September 2024

InternationalJournal of Manpower

Vol. 45 No. 10, 2024

pp. 144-161

Emerald Publishing Limited

0143-7720

DOI 10.1108/IJM-03-2024-0194

1. Introduction

In recent decades, many European countries have experienced a rise in fixed-term contracts.

This trend and its potential impacts on firms and workers have drawn considerable interest

from policymakers and researchers. Some argue that the use of fixed-term contracts offers

firms the needed flexibility to adjust their workforce to market changes, allowing them to

respond quickly to technological changes and new opportunities offered by the market (e.g.

Atkinson, 1984;Kalleberg, 2001). Nevertheless, the use of fixed-term contracts can lead to

some disadvantages. For example, fixed-term contracts are associated with low job security,

low pay and low job quality, resulting in low labour commitment (Booth et al., 2002;Millward

and Hopkins, 1998), which in turn may decrease firm performance.

The empirical literature on fixed-term contracts and their impact on firm performance

provides mixed evidence. Some report a positive relationship (e.g. Arvanitis, 2005;Garnero

et al., 2016), while others show a negative one (e.g. Cappellari et al., 2012;Michie and Sheehan,

2003). However, none of the aforementioned studies appears to consider firms’ strategies for

employing fixed-term workers. In this paper, we argue that the impact of fixed-term

contracts on firm performance crucially depends on the firm’s strategies for using these

contracts. Specifically, firms may use such contracts as a buffer against demand fluctuations

(Devicienti et al., 2018), or as a screening device to select workers who will be the best fit for

the firm (Booth et al., 2002)[1]. Whereas the former allows firms to adjust their labour force to

economic shocks in the short run (Vella, 2018;Vela-Jim�

enez et al., 2014), the latter may

increase firms’ long-term growth prospects because of better job matches (Faccini, 2014).

Firms’ use of fixed-term contracts, either to buffer demand fluctuations or to screen

workers, may depend on the expected short-term and long-term (net) benefits of using these

contracts. If firms have no difficulty observing workers’ quality or monitoring workers’

efforts, and if the work requires no relation-specific investments, the potential negative impact

of using fixed-term contracts to avoid labour hoarding will be negligible. This is more likely

for low-skilled work than for high-skilled work: First, the work of low-skilled workers is better

observable and hence, it is more easily monitored than the work of high-skilled workers (e.g.

Parker et al. (2017)). Second, low-skilled work is likely to demand less investment in additional

(firm-specific) training, compared with the high-skilled one (Becker, 1975).

Previous research has documented a strong relationship between firms’ screening

strategies and firm-level conversion rates from fixed-term to permanent contracts. Firms

with screening strategies are likely to use fixed-term contracts to assess workers’ quality and

offer these workers permanent contracts upon confirmation of the worker’s quality

(Mattijssen et al., 2022). Accordingly, firms which use fixed-term contracts as a screening tool

are likely to have higher conversion rates than firms that use these contracts to flexibly

adjust their employment to economic fluctuations (Masui, 2020). Our research examines the

influence of firm conversion rates from fixed-term to permanent contracts, used as a proxy

for screening strategies, on the relationship between fixed-term employment and firm

productivity. By considering both firm conversion rates and workers’ skills, we contribute to

the literature on the impact of fixed-term employment on firm productivity through

analysing how much productivity differences between high- and low-skilled fixed-term

workers are driven by the conversion rate from fixed-term to permanent contracts.

The Netherlands is one of the European countries with a rapid rise in fixed-term contracts

over time (Eurostat, 2021). Furthermore, the increased use of fixed-term contracts in the

Netherlands is observed not only for low-skilled workers but also for high-skilled ones,

making it a compelling country to study fixed-term employment. We conduct our research by

utilising a rich longitudinal employer-employee dataset from Statistics Netherlands that

includes 66,432 Dutch enterprises in private sectors between 2011 and 2017. We follow the

empirical approach of Addessi (2014) and Castellani et al. (2020) that captures the dynamic

efficiency of labour markets.

International

Journal of

Manpower

145