Starting your career with a temporary job: stepping-stone or 'dead-end'?

Abstract

This paper uses panel data from the UK (BHPS) and Germany (GSOEP) to investigate the wage effect of entering the labour market with a temporary job. Further than the previous literature that studied the effect of the contract type on wage dynamics in the explained part of a wage regression, we also investigate the effect of the starting contract on the variance of unobserved individual effects and random earnings shocks. For this purpose, we decompose earnings into their permanent and temporary component and study the effect of such a labour market entry on each of these components. In the permanent component, we distinguish between initial unobserved earnings ability and experience-related heterogeneity. Our results for Germany, verify the existence of a wage penalty for entering the labour market with a temporary contract. This penalty disappears after 12 years for male workers and after 7 years for the female workers. In contrast, in the UK, no such wage penalty is found. However, in the UK, the initial unobserved earnings capacity is higher for workers starting off with a permanent job. No such difference emerges in Germany. In none of the two countries do we find a difference between the two groups of workers in the effect of experience-related unobserved heterogeneity. Initial inequality in the unobserved earnings capacity gradually disappears due to experience-related heterogeneity for all groups except for the British workers that entered the labour market with a temporary job. The persistence of earnings shocks is higher for workers entering the labour market with a temporary contract.