Flexible wage contracts, temporary jobs and firm performance: evidence from Italian firms

This paper focuses on the effects of decentralized wage schemes and temporary forms of employment on firm performance. The effect of monetary incentives on workers’ effort and firm performance is a central topic in economics. According to the principal-agent paradigm, firms (the principal) have to link employees' remuneration schemes to any verifiable indicator of performance in order to avoid opportunistic behaviour. The empirical evidence shows that financial incentives have the potential to exert strong effects on indicators of firm performance, such as productivity and worker absenteeism, though the degree of effectiveness of such schemes varies significantly according to the institutional/economic context in which firms operate. From both a theoretical and empirical point of view, the prediction on the effects of temporary types of employment on effort and productivity is less neat. In the light of these considerations, this paper uses a sample of Italian firms to provide further empirical evidence on whether and to what extent performance related pay schemes and contract flexibility affect workers’ effort (in terms of absenteeism) and, in turn, firm productivity. These effects are analyzed for different types of workers (white collars vs. blue collars), working in workplaces characterized by a different degree of uncertainty and risk and in firms operating in different economic and institutional settings. Our results show that wage flexibility has a significant effect on effort and then on firm's productivity and that white collars are more responsive to monetary incentives than blue collars. Moreover, the presence of a large share of temporary contracts, implying a lower dismissal probability for permanent workers and a deterioration of the working environment, appears to reduce workers' motivation and effort.