How Are Fixed-term Contracts Used by Firms? An Analysis Using Gross Job and Worker Flows

Using Spanish establishment level data on temporary and permanent job and worker flows, we examine firms’ relative usage of fixed-term contracts in response to changes in their prior net employment expectations for the short-run and the long-run –viewed as proxies of how a wide variety of future shocks are ultimately perceived by establishments. The employment response of establishments to changing net employment expectations for the short-run is, primarily, suggestive of their reliance on fixed-term contracts as a buffer to cushion short-run changes in demand as well as to shield permanent workers from downward workforce adjustments. In contrast, their response to changes in net employment expectations for the long-run mostly hints on the use of fixed-term contracts as a screening device. Therefore, policies providing financial incentives to convert fixed-term into permanent contracts –thus targeting firms’ using fixed-term contracts as a screening device, are likely to only have limited effectiveness.