Temporary Employment, Precarity Trap in Low-paying Jobs, and Wage Inequality

Abstract

This study examines the association between temporary employment incidence and wage inequality by focusing on the asymmetric distribution of temporary employment across different wage layers, specifically its high concentration in lower-level deciles. We argue that a high share of low-wage jobs in total temporary employment leads to rent destruction in low-paying jobs, shifting rent allocation vertically from low to high earners, thus increasing wage inequality. We also hypothesize that the rent-shifting process is subject to some moderating factors. Specifically, we expect the effect to be amplified in industries with greater human-capital intensity and a smaller probability of temporary workers’ transition to permanent jobs, while being less pronounced in industries with greater concentration of large firms. We test our predictions with data on wages of a representative sample of the Spanish labor force, extracted from administrative linked employer-employee datasets, which include 784,206 individuals from 2006 to 2018 (total N=4,967,236 person-year observations). Employing heteroscedastic models that simultaneously examine the effects of both micro and macro-level covariates on within-industry wage variance, we find the expected positive association between the ratio of total temporary employment that is occupied by low-paying jobs and wage inequality at the industry-region-year level. The results also support our moderation hypotheses. Building on and advancing market-based and rent-destruction accounts of evolving employment practices, we introduce the ratio of temporary employment occupied by low-wage jobs as a structural source of wage inequality and discuss its theoretical and practical implications.