We study how firm heterogeneity interacts with the choice between permanent and temporary employment and different regulatory interventions.
First, we document a remarkable degree of variability in the share of temporary employees in the workforce, both across firms and over time.
We then show that this variability is associated with the response of firms to a reform that changed the regulation of temporary employment in Italy: firms that only partially relied on temporary jobs reacted by substituting between contract types, switching from temporary positions to permanent ones; firms with a higher share of temporary employees, instead, ended up destroying jobs with much higher frequency.
We turn to a search and matching model of the labor market with endogenous contract choice to rationalize these facts. In the model, firms hire workers using either a permanent or a temporary contract, based on their productivity and the expected duration of the production opportunity related to each job. Through the lens of the model we: (i) explain the empirical facts in a consistent framework; (ii) consider counterfactual scenarios, assessing the effects of regulation under different economic conditions.