When employees are only given a temporary contract even though they want to work on a permanent basis, this is known as involuntary temporary employment. This type of employment is becoming increasingly common in Europe. And as researchers from WU Vienna University of Economics and Business have now been able to show, this has a negative impact on wage growth.

“In the 2010s, wage growth was slower than predicted in Europe. And the reasons for that have long been a mystery,” says Lukas Lehner from the WU Research Institute for the Economics of Inequality. Together with Paul Ramskogler and Aleksandra Riedl from the Oesterreichische Nationalbank, WU’s Lukas Lehner has now been able to solve this puzzle: The economists analyzed wage developments in 30 European countries during the period from 2004 to 2017, and they were able to show for the first time that increases in involuntary temporary employment slow down wage growth as much as increases in unemployment rates.

More players on the substitute bench?

The link between unemployment and wage growth has been known for a long time: The lower the unemployment rate, the more wage levels increase. “From an economic point of view, you can unemployed people are very much like substitute players in a soccer team,” explains Lukas Lehner. “With more potential substitutes sitting on the bench, the competitive pressure within a team increases, which makes it more difficult for employees to negotiate higher pay levels. Our study shows that, in addition to unemployed people, now it’s also involuntary temporary employees who are sitting on the substitute bench.”

The extent of the ensuing competitive pressure and the resulting negative impact on wage growth depends on the labor market institutions in the respective countries, however. The more coordinated the employees are in their wage bargaining, the lower the competitive effect and the weaker the effects on wage growth. In the Scandinavian countries, where over 40 percent of employees are organized in trade unions, the effect is hardly noticeable at all. In Spain or Poland, on the other hand, where less than 20 percent are trade union members, the effect is very marked. “Austria is a special case in this respect because it has a very high percentage of employees covered by collective bargaining agreements and coordinated wage bargaining,” Lukas Lehner explains. As a result, the competition effect observed in Austria is very slight as well. “But overall, we’re predominantly seeing strong competition effects in Europe,” Lehner points out.

Luring employees with permanent contracts

In 2017, the average rate of involuntary temporary contracts in Europe was 5.5% – only slightly below the average unemployment rate of 7.4%. However, the Covid pandemic and the subsequent economic upturn have changed the situation on the labor market. “Due to the current labor shortage, employers have to compete for staff again,” explains Lukas Lehner from the WU Research Institute for the Economics of Inequality. As a result, the proportion of temporary employment contracts has gone down significantly. “At the moment, offering a permanent contract right away is a popular incentive for strengthening employee retention,” Lehner says.

When this situation changes again, however, economists will no longer be perplexed by future wage growth forecasts – thanks to the study by Lukas Lehner, Paul Ramskogler, and Aleksandra Riedl. And, as Lukas Lehner points out, “If we are to curb inequality in the labor market, it is a great advantage to have labor market institutions that are strong and as inclusive as possible, such as Austria’s system of social partnership.”

Detailed study results and further information

Lehner, L., Ramskogler, P., & Riedl, A. (2024). Beggaring Thy Co-Worker: Labor Market Dualization and the Wage Growth Slowdown in Europe. ILR Review.
Link to the study