Excessive flexibility due to flexible contracts can negatively affect workers well-being

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On Friday, March 22, 2024, José Gabriel Carreño will defend his PhD thesis titled: Three Essays on Wage Compensation and Flexible Contracts. In his PhD thesis, Carreño found that the reliance on flexible contracts may lead to a decrease in worker welfare. This excessive flexibility, while beneficial for economic stability to some extent, can result in job insecurity for workers, adversely affecting their overall well-being.

In one of the chapters of his PhD thesis, Carreño reports on the macroeconomic consequences of flexible contracts in the economy, drawing upon Dutch data. The findings indicate that flexible contracts play a crucial role in macroeconomic stabilization (smoothing down the ups and downs in the economy). However, this benefit is counterbalanced by increased employment instability among flexible workers. The chapter reveals a relationship between welfare and the prevalence of flexible contracts, providing essential policy insights for countries with dual labor markets. Carreño: "In an economy without flexible jobs, increasing the share of flexible jobs also increases overall well-being. However, beyond a certain point, more flexible jobs decrease overall well-being"

Negative impact on worker well-being

Carreño explains how the excessive flexibility in contracts negatively impacts workers’ well-being: "Lower hourly wages, increased working-hour volatility, and greater exposure to unemployment characterize the labor market. In other words, workers rotate among low-paying firms, facing uncertain monthly working hours, and frequently transition into unemployment. This results in a decrease in overall well-being."

Pros and cons of flexible contracts

Carreño: "To balance the pros and cons of flexible job contracts, it’s important for those who make laws to find a middle ground. Flexible contracts can make it easier for companies to adjust their staff as needed and can help firms to deal with downturns of the economy. However, these contracts can also lead to uncertain job situations and lower pay for workers. Policy makers can help by making sure there are strong support systems for workers, creating rules for fair treatment, offering benefits to companies that give stable jobs, and helping workers learn new skills. This way, firms can still enjoy flexibility, but workers also get the protection and opportunities they need."

Advice for policy makers

Carreño: "Contractual flexibility may decrease worker wellbeing after some point. Therefore, my results formalize the concerns about wellbeing in the growing flexible labor sector in the Eurozone and urge policy makers to pay special attention to regulations that induce more flexible labor arrangements in this region."

According to Carreño, it is essential for policy makers to harness the economic advantages of flexible contracts while safeguarding worker welfare. Such a balance is vital for fostering a labor market that simultaneously supports economic resilience and ensures the well-being of the workforce.