Contribution wedge and social security in atypical contracts: the role of the State in the matching process on the labour market

Analysing the employment performance of several European countries, some recent theoretical studies assume the existence of a direct correlation between the introduction of new forms of flexibility in labour contracts and the matching function between demand and supply of labour. Indeed, from a theoretical and empirical point of view such results should be carefully qualified. We show – through two distinct theoretical models – that a persistent and pervasive condition of minor wages and reduced guarantees could lead to a wage push. Such an effect could produce a different (and maybe not better) equilibrium in the labour market. The empirical analysis shows, first of all, that better employment performances are linked more to the spread of part-time work rather than to other forms of flexibility and, secondly, several of the new forms of labour contracts not only affect net earnings and hiring/firing costs, but also permit a reduction of the tax wedge. Since, the tax wedge represents – at least in Italy – one of the main ways to finance the social protection benefits, a reduction of the tax wedge could mean less social protection benefits and then a loss in welfare for workers, unless such a reduction is counterbalanced by an increase of other contributions. Therefore, a persistent and pervasive recourse to atypical labour contracts represents one of the reasons for a potential wage push in the labour market.