Tax Wedge and Social Protection in Atypical Contract: the Role of State in the Matching Process on the Labour Market

Analyzing the employment performance of several European countries, some recent theoretical works assume the existence of a direct correlation between the introduction of new form of flexibility in the 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 can lead to a wage push. Such 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 more linked to the spread of the part-time than to other forms of flexibility and, secondly, several of the new forms of labour contracts not only affects the net earnings and the hiring and 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 security benefits, a reduction of the tax wedge could mean less social security benefits and subsequently a loss in welfare for workers, unless such reduction is counterbalanced by a increase of other contributions. Therefore a persistent and pervasive recourse to atypical labour contracts one of the reasons for a potential wage push in the labour market.