Labor Market Duality and the Impact of Prolonged Recession on Employment in Croatia

Abstract

The term labor market duality can be used to describe different forms of labor market segmentation. Nevertheless, this term is most often used to describe the segregation between permanent employees and workers employed on a temporary basis. There is a consensus in the literature that labor market duality most often occurs after governments engage in asymmetric reforms of the labor market legislation, which significantly liberalize the use of temporary contracts, while retaining a high level of employment protection for permanent workers. This paper analyzes whether in Croatia as a country with relatively rigid labor market legislation there are signs of labor market duality. The analysis is motivated by the recent data on employment flows showing that companies have intensified temporary hiring in recent years, which might be considered as a sign of increasing labor market duality. However, this paper discusses labor market developments in the context of persistent recession, taking into account that such changes in the employment flows could be a cyclical phenomenon reflecting high risk aversion of companies.