Labour market flexibilization and wage growth: did workers reap the benefits?

There is a hot debate in the Netherlands on the effect of labour market flexibilization on workers. This paper investigates the link between flexibilization and the wage growth. The economic insider-outsider theory predicts that flexible workers are paid less and that flexibilization will lead to lower wages. In this paper, I use Bartik instruments in a fixed-effects regression design to investigate Dutch data on 19 economic sectors in the last two decades. I exploit the initial variation in the incidence of flexible labour as a measure of exposure to two legal changes that promoted flexibilization. It turns out that the earlier law favouring temporary contracts increased wage growth, whereas the later law favouring self-employment decreased it. This is probably due to the increasing use of flexible labour to avoid the payment of social contributions, and a change over time in the way flexible labour is deployed. The findings show that flexible labour is used by employers to economize on wage costs, and can therefore erode wage growth.