Wage differentials between permanent and temporary workers: Firm and occupational segregation

Published as an article in: Moneda y Crédito (2004), 219, pp.: 43-68.

The main issue of this paper is to measure the impact of segregation of workers with fixed-term contracts into low-paying firms and low-paying occupations within the same firm to explain wage gaps between these workers and those with indefinite contracts. Once segregation is removed, I analyze the sources of their wage gaps within occupations in the same firm. The data used are the Spanish data from the Survey of Earnings Structure, which was carried out in 1995 in most countries of the European Union, and contains very detailed information on wages and other individual characteristics of around 130,000 full-time workers. The raw wage gap between workers with fixed-term and indefinite contracts is 0.43. Results indicate that segregation of fixed-term workers into low-paying firms and into low-paying occupations within the same firm accounts for 51 percent of the overall wage gap between these two types of worker. The remaining 49 percent of the overall wage gap (0.22) arises from better outcomes of workers with indefinite contract relative to workers with fixed-term contracts within occupations in the same firm. Furthermore, 57 percent of this gap (0.12) is due to higher observed skills of workers with indefinite contracts relative to their fixed-term counterparts that work in the same occupation within the same firm. A remaining gap of 0.09 (0.11 for men and 0.04 for women) remains to be explained once differences in observed skills are taking into account. Selection of workers into different types of contracts is not found to be an important factor in explaining average wage gaps between these two types of worker.