The Type of Contract and Starting Wage and Wage Growth: The Evidence from New Graduates from Post-Secondary Schools in the Netherlands

This paper examines the impact of a type of employment contract on starting wage and short-term wage growth. I estimate the differences in starting wage and wage growth patterns between temporary and permanent workers by using a dataset from the Netherlands. The data contain new graduates from post-secondary schools in the Netherlands. As in the continental European countries, the use of temporary employment is common in the Netherlands, especially among young workers. Those who just graduate from school have less experience in the labor market. It is rather difficult for an employer to find a qualified worker. Because of high firing costs for a permanent worker, an employer has to bear more costs if employing an under-qualified worker. To avoid this, an employer engages in a more intensive search processes when hiring a worker on a permanent worker, which increase search costs. If such costs are passed on to a permanent worker, the starting wage is expected to be lower for a permanent worker than a temporary worker. The empirical comparisons of the starting wage shows evidence of a lower starting wage, but this is not robust to differences in estimation structure. The comparison of the wage growth between the two types of contract shows that wage growth is more suppressed for a temporary worker than for a permanent worker. Since the observations are those who have little job experience, training upon employment is important. As a matter of fact, almost all relevant observations receive training at the beginning, regardless of type of contract. Employers could recoup the costs of training by suppressing the wage growth relative to underlying productivity growth. An employer suppresses wage growth more for a temporary worker than a permanent worker as the shorter employment period of a temporary worker leaves the employer with less time to recoup the costs. The empirical results confirm this hypothesis, and these findings are robust. The empirical strategy in this paper takes into consideration the fact that the type of contract is presumably determined endogenously even after controlling for observable individual characteristics. The empirical results indeed indicate that this selectivity issue is necessary to be considered.