Flexibility, Labour Retention and Productivity in the EU

This paper examines the relationship between internal flexibility, the employment of fixed-term contract workers and productivity in 27 European Union countries. Drawing on European Company Survey data, the paper assesses whether establishments that employ on a fixed-term basis experience higher productivity than their competitors and stronger labour productivity improvements over time. These issues are of importance, given the recent weakness of productivity growth in many EU member countries, the steps that governments have taken to relax rules relating to the employment of fixed-term workers, and the emphasis placed on contractual flexibility within the European Commission's flexicurity agenda. The paper finds that establishments that do not use fixed-term contracts enjoy productivity advantages over those that do. Establishments that employ on a fixed-term basis but retain workers once their fixed-term contract has expired perform better than those that do not retain workers. The findings also show that establishments that pursue internal flexibility report both higher productivity than competitors and productivity increases over time. In addition, they are more likely to retain workers who have reached the end of a fixed-term contract.