Labor market reforms in Europe: towards more flexicure labor markets?

Eichhorst, Werner; Marx, Paul; Wehner, Caroline Article Labor market reforms in Europe: towards more flexicure labor markets? Journal for Labour Market Research Provided in Cooperation with: Institute for Employment Research (IAB) Suggested Citation: Eichhorst, Werner; Marx, Paul; Wehner, Caroline (2017) : Labor market reforms in Europe: towards more flexicure labor markets?, Journal for Labour Market Research, ISSN 2510-5027, Springer, Heidelberg, Vol. 51, Iss. 3, pp. 1-17, https://doi.org/10.1186/s12651-017-0231-7 This Version is available at: https://hdl.handle.net/10419/180121 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Eichhorst et al. J Labour Market Res (2017) 51:3 DOI 10.1186/s12651-017-0231-7 ORIGINAL ARTICLE Labor market reforms inEurope: towardsmore flexicure labor markets? Werner Eichhorst1*, Paul Marx1,2 and Caroline Wehner1,3 Abstract Labor market segmentation refers to a salient divide between secure and insecure jobs and is related to problems in important areas, including macro-economic efficiency, workers’ well-being and repercussions for social cohesion. EU-28 countries have started a new wave of labor market reforms in the aftermath of the 2008/2009 crisis to tackle a number of issues, including labor market segmentation. This particularly concerns reforms in: (1) employment protection, i.e. dismissal protection and restrictions on fixed-term contracts; (2) unemployment benefit generosity and coverage; and (3) the intensity of active labor market policies. The paper provides an overview of reform patterns and tries to assess whether and to what extent these reforms have led to less dualized, more ‘flexicure’ labor markets in terms of dismissal protection, the provision of unemployment benefits and access to ALMPs. In particular, we will provide some evidence on potential changes in hirings on temporary contracts. Keywords: Employment protection, Labor market reforms, Unemployment insurance, Flexicurity JEL Classification: J42, J48, J68 © The Author(s) 2017. This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. 1 Introduction Labor market segmentation has been one of the most prominent topics in recent European policy debates. The issue has gained new momentum with the asymmetrical impact of the 2008/2009 recession on young people and the subsequent wave of labor market reforms implemented particularly in countries hit by the crisis. In Europe, segmentation has mainly taken the form of a divide between permanent and temporary jobs and it is this aspect we will focus on. The goal of this paper is to show trends in this form of labor segmentation, provide an overview of recent labor market reforms and assess whether these reforms have deepened the segmentation or—reversing a long-standing trend—helped to overcome divides in the labor market that were often attributed to institutional dysfunctionalities. While our contribution is mainly descriptive, we nonetheless believe it is important for academic and policy debates. In the past years, segmentation has become a major impetus for deregulation. Various European countries have, for instance, lowered employment protection with the explicit goal to overcome segmentation. Given that deregulation can have social and political costs, it is important to accumulate evidence on the effectiveness of this approach. However, deregulation is not the only way to tackle segmentation, neither in practice nor in theory (Rubery and Piasna 2016). The flexicurity approach emphasises, for example, how social protection and human capital investment can compensate for lacking job security. Against this background, we consider a broad range of policies that could, in principle, tackle labour market segmentation. This perspective allows us to remain as open as possible in answering to our overarching question: which policy approach can contribute to overcoming segmentation? We show that EU member states adopted various policy strategies to address segmentation in the aftermath of the Great Recession. The issue clearly has a prominent place on policy agendas. That said, the more pessimistic message of our analyses is that these initiatives have (so far) failed to produce a noticeable reduction in labour market segmentation—a best practice case is difficult to find. The paper is structured as follows. We begin with two short background sections on segmentation theory and Open Access Journal for Labour Market Research *Correspondence: [email protected] 1 IZA Institute of Labor Economics, Schaumburg-Lippe-Str. 5-9, 53113 Bonn, Germany Full list of author information is available at the end of the article Page 2 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 on patterns of temporary employment in the European Union, highlighting considerable segmentation between temporary and permanent jobs, even if upward transitions happen frequently. In the subsequent section, we review recent attempts of member states to address labor market segmentation on four dimensions: employment protection legislation (EPL), unemployment benefits, active labor market policies (ALMP) and working-time flexibility. We will assess the extent to which segmentation has been reduced or deepened through reforms, particularly regarding EPL, unemployment benefits and ALMPs. Subsequently, we briefly point to the challenges that policy-makers face in reducing labor market segmentation. A final section concludes and derives policy recommendations. 2 Theoretical background What do we mean when we talk about labor market segmentation? The term has been used in different ways over recent decades (see below). In this article, we will use it to refer to a salient divide in European labor markets between secure and insecure jobs. This divide has been institutionalized by the creation and expansion of non-standard forms of employment, most notably temporary employment (such as fixed-term and agency work) (Eichhorst and Marx 2012; Marx 2015). It does not make much sense to think of segmentation in static terms. A labor market is only segmented if there are significant mobility barriers. A large stock of temporary workers in the labor market is unproblematic if there is high mobility into secure jobs; indeed, many temporary workers make such a successful transition. However, segmentation exists if workers feel ‘trapped’ in unstable and insecure jobs, interrupted by repeated unemployment spells. Addressing segmentation thus means addressing (lacking) mobility into stable jobs. It is noteworthy that segmentation and its causes have been theorized from rather contradictory perspectives (Marx 2012). Originally, segmentation was seen as a consequence of employer strategies reinforcing sociostructural divides (Doeringer and Piore 1971; Reich etal. 1973). Since the 1990s, the dominant perspective has been to explain segmentation as a result of labour market institutions. Employment protection legislation in particular has been identified as a mobility barrier into the core labor market (Bentolila etal. 2012; Rueda 2005; Saint-Paul 1996). The reason is that employers anticipate turnover costs, which incentivizes relying on a small core workforce complemented with a periphery of temporary workers. The reverse reasoning that deregulating employment protection could reduce segmentation and ‘insider–outsider divides’ is strongly reflected in contemporary policy advice. However, empirical evidence supporting this conjecture is sparse (Kahn 2010; see Rubery and Piasna 2016 for an overview). Our contribution to this debate is to assess to what extent countries have embarked on the flexibility (or flexicurity) agenda (again) and if this has led to a reduction of segmentation. This is justified in particular by the fact that the crisis has led to intense efforts to reform dismissal regulation. Because this institution that has been characterized by strong path dependence (Boeri 2011), past research could only exploit very limited over-time variation for such analyses. To be more specific, we have to be clear about which problems resulting from segmentation are to be addressed. With some simplification, they can be found in two broad areas: macro-economic efficiency and workers’ well-being. Regarding macro-economic effects, there are indications that the growth of temporary employment has hampered productivity growth (because investment in the workforce is discouraged) and failed to increase employment levels (because secure employment is substituted with temporary jobs) (Boeri and Garibaldi 2007; Boeri 2011). There is also strong evidence that job insecurity and temporary contracts in particular depress workers’ health and well-being (Benach et al. 2014; De Cuyper et al. 2008). Naturally, the same is true for unemployment and poverty, as experiences that are inevitable if mobility out of insecure jobs is lacking. There are strong indications that the stress caused by such social problems not only impedes health but also interferes with central aspects of people’s lives, including cognitive abilities, family formation and parenting (e.g. Mani etal. 2013). What makes segmentation and labor market risk particularly stressful is that many European welfare states are ill-prepared to deal with non-standard workers. Built upon the assumptions underlying the post-war employment model, eligibility criteria for social insurance benefits often disadvantage workers with short and interrupted work records (Berton et al. 2012; Clasen and Clegg 2011; Hinrichs and Jessoula 2012). As Palier and Thelen (2010) emphasise, political representatives of core workers in countries with strong segmentation have incentives to design social policy in an exclusionary way. This would mean that employment structures and welfare state institutions reinforce each other in producing labor market disadvantage. Such ‘dualization’ is diametrically opposed to the notion of flexicurity, as it has been promoted by the European Commission for some time. Here, the idea is that the welfare state compensates for disadvantage in the labour market and facilitates mobility. While the political economy literature is sceptical regarding the prospects of modernizing social security systems along the lines of outsider-friendly flexicurity (Rueda 2006, 2014), there is Page 3 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 little empirical evidence on this aspect in a broad comparative perspective. However, the crisis has brought insufficient protection of temporary workers in many countries to the forefront and we believe it is important to assess reform efforts in this area. 3 Background: labor market segmentation inthe European Union In this article, we focus on a specific form of segmentation, namely segmentation between workers with permanent and temporary employment contracts. While this is not to deny that other potentially precarious forms of non-standard employment existincluding part-time employment, temporary agency work, and quasi-dependent self-employment—as opposed to temporary employment, part-time employment is predominantly voluntary in most European countries.1 Moreover, while temporary agency work and dependent self-employment can be highly precarious, they make up considerably smaller shares of the European workforce. Figure 1 presents the development of the share of workers with temporary employment contracts in the EU-28 countries. Besides the share among all wage earners, it also presents shares among young (15–29years) and older workers (55–54years). First of all, there is considerable variation across member states. For instance, low shares of around six per cent or less are observed in Bulgaria, Estonia, Latvia, Lithuania, Romania and the UK. Shares considerably above the EU-28 average of 14% can be found in Croatia, Sweden (both 17%), Cyprus (19), Portugal, the Netherlands (both 21), Spain (24) and Poland (28). The solid black line in Fig.1 very clearly shows that the young are disproportionately affected by temporary employment. While this is a well-known pattern, a discomforting finding is that the gap between the young and the general population is dramatically growing in some countries, particularly Croatia, France, Italy, Netherlands, Poland, Slovenia and (in most recent years) Spain. Furthermore, there is a growing share of temporary employment among the young in Germany, although the development is difficult to assess against the background of Germany’s sizable apprenticeship system, which is responsible for about half of all temporary contracts. Temporary employment in the age bracket of 55–64 is substantially less pronounced compared to the general workforce in virtually all member states. The highest shares are observed for Cyprus, Hungary, Portugal, Spain (all around ten per cent) and Poland (18). Moreover, the development in this group is rather stable. Hence, we can 1 Only in Greece, Italy, Spain, and Slovakia was the majority of part-time employment involuntary in 2014. Only in Italy and Spain does it account for more than ten per cent of employment (OECD 2015). conclude that the problem pressure in terms of segmentation is much stronger among young workers and thus it seems advisable to focus on this group. Looking at stocks of temporary workers might be misleading because policy changes only affect newly recruited workers. Figure 2 thus presents the share of temporary contracts among new employment contracts (less than 3months old) at two different points in time as presented by the OECD. At this level of aggregation we observe a rather strong persistence over the past years and in many member states temporary contracts among newly recruited workers remain pervasive. A striking pattern in Figs.1 and 2 is that not a single member state managed to reverse the trend of growing temporary employment among the young. A partial exception is Spain, where many temporary jobs were lost, lowering their share in total employment. Furthermore, the decline came from an extremely high level and has been reversed in recent years, exhibiting the highest shares of fixed-term contracts in youth employment as well as recent hirings. Hence, the project of ‘addressing labor market segmentation’ cannot build upon easily identifiable best-practice cases. One important reason for this lack of success is arguably that many of the most segmented countries face a difficult overall labor market situation. The upper panel in Fig.3 plots unemployment rates and temporary employment shares among those aged 15–24 (in 2014). With youth unemployment rates above 30% and despite regulatory issues, the Mediterranean countries also suffer from a lack of labor demand and cannot offer young people a sufficient number of secure positions in the labor market. This also means that reducing temporary employment cannot be the top priority among policy-makers in these countries. There is little doubt that the negative socio-economic effects of unemployment are much more severe than those of being in a temporary job. Temporary employment does not produce segmentation if it is merely a transient experience that leads to stable labor market inclusion. However, if temporary workers remain in insecure positions for a long time, we can conclude that they are ‘trapped’ in insecure and precarious jobs. This point is best illustrated by examining the upward mobility of temporary workers. The European Commission has recently presented year-to-year transition rates from fixed-term to permanent contracts (see Fig.3). Furthermore, the OECD (2015, p. 188) has recently provided numbers for the long-term probabilities of temporary workers obtaining a permanent contract. Low transition possibilities are found in a couple of countries, which can thus be characterized as having Page 4 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 strongly segmented labor markets. Here, the share of involuntary fixed-term jobs in all temporary contracts is the highest (European Commission 2016). However, there also is a group of countries in which labor market context is less disadvantageous and temporary employment are nonetheless widespread among the young. Some of these countries—such as Austria or Germany— are characterized by large shares of apprentices among fixed-term contract holders. The lower panel in Fig.4 plots youth unemployment rates and the probabilities that temporary workers will obtain a permanent contract over a 10-year period Fig. 1 Shares of temporary in total dependent employment in different age groups, 1983–2014 (Source Eurostat (2015)) Page 5 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 (unfortunately, data is only available for a limited number of European cases). The plot reveals significant variation in transition rates: whereas virtually all temporary workers move to permanent jobs in Austria, Estonia and Germany, around half of the workers in Italy and Spain are still in temporary jobs, even after 10years. The plot also reveals that the prospects for upward mobility strongly correlate with general labor market performance. While this is unsurprising, it is important to emphasize that labor market segmentation in many European countries is closely related to the macro-economy and insufficient demand for labor. Three conclusions emerge from the analysis: (1) Segmentation—measured as the share of temporary employment—is a persistent feature of many, but not all European labor markets. To date, no member state has substantially managed to reverse the trend. (2) Segmentation is more severe in member states with high youth unemployment. This concerns the share of temporary employment as well as the prospects of mobility into permanent jobs. (3) Even if many temporary workers make a successful transition into permanent employment, segmentation does exist. Considerable shares of temporary workers appear to be ‘trapped’, even in the long run. 4 Measures taken toaddress labor market segmentation andtheir impact How have member states responded to labor market segmentation? In this section, we present measures taken over recent years in the fields of EPL, unemployment benefits and ALMPs. To reduce complexity, we will focus this review on countries with substantive shares of temporary workers and the most significant policy changes. 4.1 Employment protection legislation It is often argued that segmentation results from institutional mobility barriers. Because dismissals are costly 0 20 40 60 80 100 Spain Poland Portugal Sloveni a Sweden France Finland Netherlan ds Italy Greece Luxembou rg Germany Czech Rep. Belgium Hungary Slovakia Austria Lithuania Latvia Denmar k Ireland UK Estonia 2011-12 2006-07 Fig. 2 Share of temporary contracts among new employment contracts (Source OECD (2014, pp. 150)) 0 10 20 30 40 50 60 70 80 France Malta Spain Cyprus Poland Italy Netherlands EA 18 EU27 Greece Portugal Finland Bulgaria Germany Belgium Czech Republic Slovakia Luxembourg Sweden Ireland Hungary Lithuania Denmark Austria Slovenia United Kingdom Romania Estonia Latvia Croatia % of all employees in the previous yea r 2014 2007 2015 Fig. 3 Year-to-year transition from temporary to permanent contracts. Source: EU-SILC, European Commission (2016, pp. 88). *Data on transitions refers to 2013 for all Member States except for AT, BE, ES and FI for which data on transitions refers to 2014. For these countries, the comparison is made with 2013 while for all others 2012 is used; Data on transitions is not available for IE for 2012 or 2013 or 2014 and for RO for 2013 or 2014 Page 6 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 in strictly regulated labor markets, employers make use of temporary contracts that allow for a ‘cheaper’ adjustment of the workforce. Many policy experts have recommended deregulating EPL for regular contracts, although this has proven difficult for political reasons. Instead, many member states have deregulated the use of temporary contracts: a strategy that has contributed to segmenting the labor market (e.g. Boeri 2011; Kahn 2010). Thus, there are two possible strategies to address segmentation through EPL reforms, which are not mutually exclusive: (1) De-regulating permanent contracts; and/or (2) Re-regulating temporary contracts. As mentioned above, deregulating permanent contracts has been difficult to implement politically. However, in the aftermath of the Great Recession, some of the most segmented and crisis-ridden counties in Southern Europe implemented substantial deregulation, including France, Greece, Italy, Portugal, Slovenia and Spain (OECD 2013; Gama etal. 2015). Shown in Fig.5, EPL reforms—as well as reforms in other policy areas—can be mapped using the European Commission’s LABREF database (Turrini etal. 2015) and the ILO inventory on labor market reforms (Gama etal. 2015). In line with this we can observe major changes in the aggregate EPL index developed by the OECD and available until 2013. Here, it has to be noted that some of the most recent and probably most substantial reforms have not yet been incorporated. 4.1.1 Dismissal protection reform Regarding employment protection in case of openended contracts, Greece, Portugal, Slovenia and Spain’s post-crisis reforms considerably reduced notice periods and severance pay for (newly hired) permanent workers (see Fig.6). In Italy, building upon earlier, more partial reforms, the recent ‘Jobs Act’ stipulated that employers no longer have to reinstate workers dismissed for invalid economic reasons; whereby this reform was combined with strong employer incentives for new hirings on openended contracts, including conversions from temporary to permanent contracts, but falling short of a single type of contract removing the distinction between permanent and temporary types of employment (Picot and Tassinari 2015; Sestito and Viviano 2016). In Spain, dismissals were facilitated by extended and clarifying the reasons for separation as well as limiting severance pay through the 2010 and 2012 reforms, while strengthening the employment protection of temporary workers and encouraging internal flexibility. While the reforms in Greece, Italy, Portugal and Spain arguably bring substantive reduction of EPL for permanent workers, reforms in France and the Netherlands were more subtle. In France, workers who do not accept collectively agreed wage and working-time adjustments in economic crises can now be dismissed. In the Netherlands, the 2015 Work and Security Act simplified EPL without necessarily lowering it clarifying the cases in which courts or the Public Employment Agency decide upon the validity of dismissals. It has also introduced a streamlined formula for severance pay, which will considerably reduce the amount in some cases, while increasing it in others. Hence, the Work and Security Act brings a clarification rather than deregulation of EPL. In the other European countries with high shares of temporary workers (Finland, Poland and Sweden), no substantial reforms Fig. 4 Youth unemployment, temporary employment and transition probabilities (Source Youth unemployment and share temporary employment: Eurostat (2015); Probability permanent job after 10 years: OECD (2015, pp. 188)) Page 7 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 of EPL for permanent workers have been undertaken in recent years. 4.1.2 Temporary employment The second possibility to address segmentation through EPL reform is re-regulating temporary contracts. Indeed, there have also been some—albeit less far-reaching— changes in this direction (OECD 2013, 2014). One trend is to make the use of temporary contracts more expensive for employers, while at the same time offering monetary incentives to allow for transitions into permanent jobs. In Slovenia, the 2013 labor market reform raised employers’ unemployment insurance contributions for temporary jobs. However, if the temporary job is converted into a permanent one, employers are exempted from contributions for a limited time. The social partners in France have agreed upon a similar reform. Since May 2013, employers pay increased unemployment insurance contributions depending on the length of the contract. Contributions increase by 3 percentage points if the contract runs for less than one month, 1.5 if one to 3months and 0.5 for longer contracts. Hence, the goal is to make employers contribute to the costs of extremely flexible hiring practices. Moreover, employers in France are exempt from contributions for a limited period if they hire younger or older workers on permanent contracts. In Italy, since 2012 employers have had to pay a contribution 1.4 percentage points higher for temporary rather than permanent workers, although this is reimbursed if the job is later converted into a permanent one (see also the more recent subsidy for permanent hirings). In Spain, from 2015 onwards, temporary workers receive a higher severance pay at the end of their contract. The payment corresponds to the salary of 12days per year of employment with the firm and is considerably lower than for permanent workers. Finally, in the Netherlands, social protection for temporary and freelance workers was improved with an Act from 2013, addressing the boundary of dependent work and (sometime bogus) self-employment. Other restrictions of temporary work were implemented in the form of a lower maximum duration. In Slovenia, the 2013 reform limited the time for which an employer can use temporary contracts for a specific job to 2years. In the Netherlands, the maximum duration was limited from 3 to 2years in 2015. However, collectively agreed deviations are still possible, whereby it remains to be seen what the reform means in practice. Some countries have made the regulation of temporary work more permissive in recent years. Italy has gone furthest in this direction, whereby a recent reform has abolished the need to indicate a valid reason for temporary employment. It has also extended the maximum duration as well as the possible number of renewals. However, Fig. 5 Employment protection reforms in the EU (LABREF) (Source Turrini et al. (2015) and Kiss (2015)) Page 8 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 Fig. 6 Changes in the OECD EPL index (Source OECD Employment Protection Database, as shown in European Commission (2016), pp. 95) Page 15 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 contracts are a real social and political problem if workers see themselves in a ‘dead end’. For policy-makers, this means that ALMPs (and training in general) should be at the core of any strategy to improve the situation of lowskilled temporary workers who frequently experience unemployment. At least in countries with relatively wellfunctioning labor markets, governments should make every effort to ensure that lacking or obsolete skills do not ‘trap’ workers in chains of unemployment and precarious jobs. However, such efforts are somewhat less promising in countries where there are insufficient jobs, even for university graduates. The use of subsidies to encourage conversions of temporary into permanent contracts is a plausible and quite widely used alternative, although it needs careful monitoring and evaluation. However, we can expect that mobility-enhancing investments in human capital are most promising if employment protection is reformed in a way whereby mobility is encouraged and transitions to long-term employment are facilitated. Another important concern for policy-makers should be avoiding multiple disadvantages through the welfare state. The modernization of unemployment and pension systems towards more universal schemes would not only improve the socio-economic situation of temporary workers but also increase the legitimacy of the dual employment model. If society compensates temporary workers for their higher risk by offering decent and accessible social security, this could lessen feelings of political marginalization or exclusion. As the fiscal situation in most affected member states does not leave much leeway for social policy expansion, the politics necessary for such changes are complex and probably involve zero-sum conflicts. However, the recent Italian reforms towards more universal unemployment benefits demonstrate that these are not insurmountable hurdles. However, an important objection to ‘fixing’ the temporary employment issue with social benefits and labor market policies is that turnover costs are shifted from employers to society. Another way of compensating temporary workers for their risk is granting them ‘insecurity bonuses’, as achieved in France in the form of the prime de précarité. In this system, employers have to pay a bonus to the worker (amounting to ten per cent of the total gross wage paid under the contract) if the employment relationship is not continued after the contract has expired. As mentioned, since 2013 there has also been a higher employer contribution rate to the unemployment insurance fund in case of short fixed-term contracts. This system ensures that employers contribute to the social costs of their hiring practices and increases incentives to use temporary contracts responsibly. In addition, it might reduce the perception among temporary workers being disadvantaged in several dimensions (unemployment risk and lower wages). For such a system to be effective, it would be important that, first, the bonus is sufficiently high to substantively affect employers’ incentives and workers’ material situation (albeit without totally discouraging hiring). Second, it has to be ensured that there are no legal loopholes that allow circumventing the bonus. Third,—and a more general point—the equal-pay principle has to be vigorously enforced through monitoring by unions and labor inspectors as well as through severe sanctions in case of non-compliance; otherwise, employers can cancel out the insecurity bonus by lowering temporary workers’ wages, a practice that already seems to be widespread. An alternative way to provide temporary workers with employer-financed social security is the Austrian Mitarbeitervorsorgekassen. In 2003, severance payments were replaced with a system in which employers contribute on a monthly basis to an account for each worker. When the employment relationship is terminated, workers can withdraw the money from their account (instead of a severance payment) or carry it over to their next job and use it as pension savings. An advantage of this model is that also self-employed can be integrated, which is the case in Austria since 2008. Besides providing additional financial security to insecure workers, the system also overcomes stark differences in separation costs. However, one has to note that there is no incentive to employers to refrain from dismissals. There is no magical formula to address labor market segmentation, with fiscal, economic and political circumstances significantly limiting room for maneuvre. Member states should nonetheless continue to carefully modernize labor law and welfare states, even if it is only possible in an incremental way. Radical deregulation of permanent contracts or re-regulating of temporary contracts should be avoided. Policy-makers should also resist the temptation to cut ALMPs and training programs in particular. Given its favorable long-term consequences, training programs targeted at the most needy should be an important pillar in any strategy to address segmentation. Member states should continue to experiment with fiscal incentives to convert temporary into permanent contracts, while carefully evaluating the schemes and making their survival conditional upon success. Finally, it will be important to move towards a better social protection of temporary workers. For economic and symbolic reasons, employers will have to make a relevant contribution to this. Austria, France and Italy exemplify different approaches that could be developed into more broadly applicable strategies to address segmentation. Page 16 of 17 Eichhorst et al. J Labour Market Res (2017) 51:3 Still, there are considerable challenges regarding the politico-economic feasibility of such reforms. First, political preferences matter. If segmentation is addressed though reducing the social rights of ‘insiders’, it can be difficult to organize democratic majorities for such proposals. EPL is a case in point, whereby it is unsurprising that deregulation only took place under severe reform pressure. Moreover, expanding social protection for vulnerable workers could be met with resistance from the majority with a low unemployment risk (the net payers) owing to the considerable costs of such reforms. However, it also should be noted that the political economy literature greatly exaggerates the extent to which public opinion is divided between insiders and outsiders. There is considerable solidarity across the insider–outsider divide (Marx 2015), to which policy-makers can appeal, in particular in hard times. Second, the macro economy and budget constraints play a crucial role. In some countries there simply seems to be insufficient labor demand to offer secure jobs to the entire workforce. In a context of high unemployment and economic uncertainty, it is understandable if workers and policy-makers view temporary employment as the lesser of two evils. The situation is exacerbated by the fact that that (political and economic) room for stimulating the economy is very limited in the context of the European debt crisis. Apart from EPL and industrial relation reforms, substantially improving the situation of the unemployed and temporary workers costs money: in the form of training for those with insufficient skills, wage subsidies, decent jobs in the public sector and adequate social protection (against unemployment and in old age). Needless to say, funding such reforms is particularly challenging in times of austerity. Policy-makers will have to look for ways to make employers contribute to the social costs of their hiring practices, without making temporary contracts so expensive that hiring is discouraged. This could also be an issue for EU level policies. Author details 1 IZA Institute of Labor Economics, Schaumburg-Lippe-Str. 5-9, 53113 Bonn, Germany. 2 University of Southern Denmark, Odense, Denmark. 3 Federal Institute for Vocational Education and Training (BIBB), Bonn, Germany. Acknowledgements A draft of this paper was presented at the IZA/ILO Conference on ‘Assessing Labor Market Reforms’ held at the ILO in Geneva on 10 March 2016. The authors are grateful to Guy Mundlak and other colleagues participating in the discussion for their comments on the earlier version. We are also grateful to two anonymous referees and to Sarah Stahlmann for her excellent research support and to Richard Forsythe for editorial suggestions. Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. 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