What we’re reading about job tenure in European labor markets

Technological progress and international competition require firms to adapt to rapid changes in product markets and in production processes. As a result, concerns about the potential decline of stable jobs have intensified.

Firms need to be more agile to adapt to the evolving demands of new products and services, while workers experience more frequent job transitions. Flexible and temporary contracts allow firms to adjust workforces to changes in the economic environment. Such contracts also offer firms opportunities to hire workers whose productivity cannot be fully assessed in advance.

Flexible contracts are less attractive to workers, however, as they carry more risk of job instability, and both wage growth and investments in training tend to be lower. For this reason, there is evidence that workers may be willing to incur a wage penalty in exchange for job security. The concerns with contract stability are especially acute in countries with aging populations, as an older workforce adjusts less easily to labor market shocks and retraining, and mobility is less profitable. Appropriate labor regulations and social protection instruments are thus important to enable and accommodate flexibility.

The economic research on job tenure – part of the extensive literature on labor market flexibility and job mobility – explores how tenure is related to well-being and equity, and its linkages to efficiency. Considering the length of job tenure as a key measure of job stability, tenure can be seen as one of the main drivers of job satisfaction and workers’ well-being. Long-lasting tenure is particularly relevant in Europe, where the idea of a “job for life” was part of its citizens’ collective identity in the second half of the 20th century. Many Europeans still hold that ideal job as their primary reference point, even if fundamental changes in labor markets since the 1970s broke the implicit contract of long-term commitment between employers and workers. The empirical finding that flexible, part-time, non-traditional labor contracts with shorter tenures are more prevalent among younger cohorts or less well-paid workers suggests that this labor market transformation has regressive distributional impacts.

In addition, from an equity perspective, changes in job tenure also impact wealth accumulation. Households whose members have more stable jobs accumulate more wealth even when controlling for income. Analyzing the evolution of job tenure can be informative about changes in the labor market and the expected evolution of household welfare. Tenure also reflects the efficiency of job matching. When workers and employees are satisfied with the job match, only a strong shock can sever employment, while inferior job matches are more prone to dissolve quickly. Thus, changes in the average length of job tenure, in the absence of significant regulatory changes, can also indicate changes in how good job matches are on average.

Tenure is also essential for human capital investment decisions, as firms often train workers in firm-specific tasks, and workers themselves gain tacit and firm-specific knowledge the longer they are employed, in turn increasing their productivity. The relationship between tenure and productivity may not, however, be linear and may plateau. In the long run, regulations that induce excessive use of temporary contracts or that favor high job turnover can harm productivity.

Job tenure

• Explaining the Evolution of Job Tenure in Europe, 1995–2020. (Bussolo, M., Capelle, D., Lokshin, M., Torre, I., & Winkler, H. Policy Research Working Papers; World Bank, Washington, DC. 2022)
• Job Tenure and Structural Change in the Transition Economies of Europe. (Bussolo, M., Lokshin, M., Oviedo, N., & Torre, I. Policy Research Working Papers; World Bank, Washington, DC. 2022)
• Routine-manual skills drive early wage growth, while cognitive-abstract skills become more important later in careers. (Adda & Dustmann, Journal of Political Economy, February 2023)
• The decline in the rate of on-the-job search and resulting weakening of wage competition among firms may help explain recent low inflation in the US. (Faccini & Melosi, Federal Reserve Bank of Chicago Working Paper, January 2023)

Essential readings

• The shorter job tenure of workers entering European transition economies in the 2000s may compromise their long-term welfare given links between wealth accumulation and average tenure. (Lobao et al., World Bank, October 2022)
• Higher trade openness and ICT-related technological change are correlated with an increase in the probability of holding a short-term job in Europe from 1995 to 2020. (Bussolo et al., World Bank, October 2022)
• A tractable task-based model can illuminate factors that shape earnings and employment distribution in advanced economies. (Acemoglu & Autor, Handbook of Labor Economics, 2011)
• The evolution of wages plays a key role in young male workers’ transition to stable employment. (Topel & Ward, The Quarterly Journal of Economics, May 1992)
• This study found a negative trend in mean European job tenure. (Bachmann & Felder, International Labour Review, September 2018)

Broader jobs agenda

• Workers who switch occupations and employers simultaneously have more disparate outcomes in earnings growth. (Carrillo-Tudela et al., IZA Discussion Paper, September 2022)
• Uncertainty in job search for platform workers plays a central role in inflating their work hours. (Cantarella & Strozzi, IZA Discussion Paper, December 2022)
• This paper uncovered a substantial willingness-to-pay to avoid work pressure. (Nagler et al., CESifo Working Paper, December 2022)
• By looking at recessions in Spain, these authors identified conditions under which collective contract staggering and the inability to renegotiate may amplify aggregate shocks. (Adamopoulou et al., IZA Discussion Paper, December 2022)
• Unfavorable human capital, low-paying occupations/sectors, and a wage structure drive the wage gap in Belgium between workers born in developed and developing countries. (Pineda-Hernández et al., IZA Discussion Paper, December 2022)
• This paper found that immigration and robot adoption are substitutes, suggesting more future automation in response to labor shortages. (Mann & Pozzoli, IZA Discussion Paper, December 2022)
• A professional year placement during undergraduate economics studies did not create a statistically significant salary increase. (Arsenis & Flores, School of Economics Discussion Paper, December 2022)
• Although male and female Irish graduates had similar earnings immediately after graduation, a substantial gap soon emerged, particularly for women who had children. (Doris et al., IZA Discussion Paper, December 2022)

This blog is based on the February 2023 edition of the Knowledge4Jobs newsletter, curated by the World Bank’s Jobs Group and Labor and Skills Global Solutions Group. Click here to sign up for the Knowledge4Jobs newsletter.