Temporary Contracts and Monopsony Powerin the UK Labour Market

This paper addresses the applicability of the theory of equalizing differences (Rosen, 1987) ina market in which temporary and permanent workers co-exist. The assumption of perfectcompetition in the labour market is directly questioned and a model is developed in which thelabour market is described as a duopsony and the relation between wage and non-monetaryjob characteristics is studied for workers with different contract lengths. The empiricalanalysis, based on several waves of the UK Labour Force Data, confirms several of thehypotheses suggested by the model and emphasizes how in the short run workers who haveexperienced a change in their employer can expect a career trajectory in line with the theoryon compensating differentials. In particular, while the wage dynamic related to workersshifting from a temporary contract to another temporary position cannot be exactly predicted,shifts from temporary to permanent contracts tend to be linked to a reduction in wages and asimultaneous increase in travel-to-work distance. Nonetheless, when unobservedcharacteristics are accounted for in the selection process into temporary contracts, theseresults lose significance and only a positive relation between wage and commuting timepersists, irrespective of the type of contract....