Labor Markets Briefs

Temporary Limitations: Why Europe Uses Temporary Workers More Frequently than the US Does

October 16, 2018

Widespread coverage of the growth of the ‘gig economy’ suggests that the US is ground zero for work done for fixed periods with a given employer before moving onto the next job opportunity. However, the Bureau of Labor Statistics’ recently released “Contingent and Alternative Employment Arrangement” survey shows that the share of workers employed in temporary contracts declined from an already low level in 2005.

To explore how limited the use of temporary contracts are in the US, it is helpful to compare the new BLS data to European data on the same subject. While the definitions of workers on temporary contracts are not identical across the two data sets, European labor markets clearly use temporary contracts far more frequently. The primary causes of these differences are Europe’s less flexible dismissal policies and more generous health and benefit regimes compared to US labor market and benefit policies.

What both sets of labor markets share is that the percentage of workers on temporary contracts has not changed meaningfully in recent years in the EU or the US. The launch of online labor market platforms like Uber have not caused employers in the US or Europe to turn towards temporary work arrangements in increased numbers during the last decade.

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Figure 1: The percent of workers on temporary contracts is much higher in most European labor markets than it is in the US.

Note: US data computed under BLS definition 3 of population of contingent workers.

Sources: Eurostat, BLS

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While the Eurostat and US data are not strictly comparable, the definitions for workers on temporary contracts in the EU and the broadest contingent worker category in the US are sufficiently similar that a comparison between the two is instructive regarding the role of temporary contracts in each labor market.

EU temporary workers are defined as those who have “a fixed term employment contract or a job which will terminate if certain objective criteria are met, such as completion of an assignment or return of the employee who was temporarily replaced.” US contingent workers include those “who do not expect their jobs to last.” This includes wage and salary workers “even if they have held the job for more than 1 year and expect to hold the job for at least an additional year,” as well as self-employed and independent contractors who “expect their employment to last for an additional year or less and they had been self-employed or independent contractors for 1 year or less.” The EU measure is calculated for those between 15 and 64 while the US measure encompasses the entire population. Under both definitions, workers who remain on temporary contracts for more than 1 year can be included, the key question for both populations is whether the arrangement has a fixed end date or some fixed goal after which the arrangement terminates. 

In 2017, 14.3 percent of EU workers were considered temporary compared to 3.8 percent of US workers that were classified as contingent. The differences between these figures is sufficiently large, that the role of temporary contracts in European labor markets is clearly more widespread than in US labor markets.

Two policy factors are key drivers behind this result. European employers are far less involved in the provision of health care and other benefits to their workers than are US employers. The consequences of losing one’s job in most European countries is unlikely to include less or more costly access to health care. While the Affordable Care Act in the US did increase the number of Americans receiving insurance through non-employer sponsored health plans, many participants receive subsidies that cover only part or none of their insurance expenses. 

US workers are also encouraged to seek work on permanent contracts because unemployment insurance benefits are less generous and of shorter duration than those offered in most European labor markets. American workers may be more risk averse because the downside of losing a job from a benefits perspective is considerably larger. In addition, European employers typically must pay severance for longer and face greater restrictions on firing workers relative to US employers, according to OECD measures of Employment Protection Legislation. European employers therefore face greater incentives than US employers to hire workers on temporary contracts when possible. It is instructive that the UK, which has less restrictive employee dismissal standards, also has the lowest temporary employment share among European labor markets.

The Conference Board’s upcoming report on non-traditional work arrangements describes an environment where the latest generation of technology has left little mark on how firms decide to procure workers. While contractor and subcontractor arrangements for many key business functions have been important for decades, data from both Eurostat and the BLS show employers still grappling with how to incorporate labor market platforms and other recent technological innovations into hiring practices. Employers continue to value lasting relationships with employees and care deeply about the skills and work habits of those they employ. Policy regimes retard the growth of temporary work arrangements for both employers and employees. Lowering the cost of contracting has proved not to be the primary barrier restraining the growth of contingent work. Unless policy and management practices evolve over the next decade, use of alternative work arrangements will show a similar lack of evolution relative this decade.