Why do firms hire on a fixed-term basis? Evidence from longitudinal data

The political and economic debate in Italy accompanying the labour market reforms of recent decades has often focused on the use of fixed-term contracts. Fears have frequently been raised about the possible use of temporary contracts not to satisfy short-term productive requirements (i?½buffer-stocki?½ motive) or to screen suitable candidates for permanent positions, but rather to manage worker turnover by avoiding the higher costs associated with open-ended contracts (especially those related to dismissals). While it is very difficult to separate out the various economic rationales for using fixed-term contracts, this paper aims to assess to what extent Italian firms use fixed-term contracts to meet monthly production needs. A simple correlation analysis shows that firms in sectors with the strongest variations in monthly production levels make more extensive use of temporary contracts: almost one third of fixed-term hiring is attributable to seasonality. Using two behavioural models where firms choose whether to hire and on what contract, it is estimated that monthly production peaks account for a non-negligible share (at least 25 per cent) of fixed-term hires.