Screening on the Job: Should Temporary Jobs Be Subsidized?

The difficulty to allocate the right workers to the right jobs is an important source of market frictions. With the expansion of atypical jobs in the mid-1980’s, the idea that screening and flexibility could be complementary motivations arose. The purpose of this paper is twofold : (i) First, we investigate the screening effect of fixed-term contracts on employment (ii) Then, we analyze different subsidized temporary job schemes and their impact on the social welfare. We extend the framework of Pries and Rogerson (2005) by allowing firms to hire workers on both temporary and permanent jobs. Screening takes the form of a learning process where both the employer and the employee infer the match quality during a temporary job. We show that when temporary jobs are used as a screening device, they increase the employment size. Hiring and wage subsidies reduce both the unemployment rate and unemployment duration but have a different impact on the transition rate between unemployment, temporary jobs and permanent jobs. The hiring subsidy can be welfare enhancing while a permanent and identical wage subsidy for all temporary employed workers is always welfare detrimental. However, allowing the wage subsidy to compensate low income temporary jobs have a positive impact on labour market performance and may increase the aggregate welfare.