The Cost of Flexibility at the Margin. Comparing the Wage Penalty for Fixed-Term Contracts in Germany and Spain Using Quantile Regression, Working Paper No. 4 of the Project Employment Relationships at Risk

Individual country analyses in both Germany and Spain have highlighted the negative consequences of fixed-term employment for individuals (Mertens and McGinnity, 2004, Jimeno and Toharia, 1993, De la Rica and Felgueroso, 1999). This paper seeks to establish whether fixed-term jobs carry the same penalty in two economies typically regarded as rigid: Germany and Spain. Recent discussion of fixed-term contracts also tends to ignore the considerable variation in the quality of these jobs and the wages associated with them. In this paper we use quantile regression to compare the wage effects of these contracts in both countries using GSOEP for Germany and ECHP data for Spain. We find that in Germany high-earning fixed-term workers experience a lower wage penalty than low-earning fixed-term workers. Moreover lower earning fixed-term workers in Germany also experience higher wage growth. In Spain, however, the wage penalty is larger and shows little variation across the distribution of wages. So while in Germany there is considerable variation in the consequences of fixed-term contracts, Spanish fixedterm workers experience a more punitive labour market. In conclusion we caution against generalising findings from Spain to other rigid European labour markets.