Contract Flexibility and Labor Demand in Belgium

Temporary jobs grew substantially during the 1990s, especially in the Belgian labor market. From a labor demand point of view, we first stress the reasons why they might reduce labor adjustment (firing) costs and to a lesser extent other labor costs, and why they might also lower labor productivity. Net effects of temporary jobs on dynamic labor demand are then estimated, assuming that firms are in operating a monopolistic competition market structure and face quadratic and symmetrical adjustment costs. The relationship is estimated on the basis of a panel of 5,551 firms observed during the period 1996–2000, using the Blundell and Bond GMM estimator. Our results suggest that higher flexibility through temporary jobs significantly favors the adjustment process but does not influence employment levels.