Dual Labour Market Intermediaries in Italy: How to Lay off “Lemons”—Thereby Creating a Problem of Adverse Selection

Abstract

Using longitudinal data from the Bank of Italy that cover the period from 2004 to 2014, this paper investigates the wage- and career implications of temporary jobs across the entire wage profile via unconditional quantile regression models and dynamic panel probit models. Building on Autor’s contributions, we consider temporary jobs to be a Labour Market Intermediary that deals with job-matching problems, such as information asymmetries, search cost reductions, worker-side adverse selection, and pay-productivity gaps. Assuming that wage is a proxy for workers’ productivity, we examine the chances that temporary workers who are located in different quantiles of wage distribution have of making the transition towards a stable employment position in the primary labour market. Results clearly indicate that temporarily employed individuals suffer significant wage- and career penalties. Not only are these individuals overly concentrated in the lowest decile of wage distribution, but the career penalty associated with temporary jobs also remains stable independently of the wage/productivity quantile to which the workers belong. If firms use FTC or TWA at all, they do so to remove less productive workers, whose work contract is not renewed once expired. In light of this evidence, it is clear that the hypothesis—proposed in the economic literature—that temporary employment contracts might serve as a screening tool to identify the most productive workers who would then be offered a stable position in the primary labour market does not hold in the highly dualised labour market of Southern Europe.