Taxation of Temporary Jobs: Good Intentions With Bad Outcomes ?

This paper analyzes the consequences of the taxation of temporary jobs recently introduced in several European countries to induce firms to create more open-ended contracts and to increase the duration of jobs. The estimation of a job search and matching model on French data shows that the taxation of temporary contracts has consequences unexpected by policy makers: it reduces the mean duration of jobs. It also decreases job creation. This result holds even if the taxation is targeted at temporary contracts of short duration and is compensated by lower taxation of open-ended contracts and of temporary jobs of long duration. Accordingly, we find that the taxation of temporary contracts increases unemployment and reduces the welfare of unemployed workers.