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Heterogeneous Paths to Stability

In this paper we investigate how specific features of short-term contracts may affect the probability of conversion into permanent contracts. To reach this objective, we study the effect of the 2014 deregulation of the short-term contract in Italy and the 2015 reduction of labour and firing costs for permanent workers. We design a search and matching model which investigates the dynamics of short-term and permanent contract choices in dual economies, in response to an institutional shock. The model predicts an increase in the utilization of both short-term contracts and permanent contracts, with a delayed increase in the conversion rate. Empirically, using data on the universe of Italian workers provided by the Italian Social Security Institute, we estimate a difference in difference model to test for the model predictions. We find interesting heterogenous effects by categories of workers.