Cristina Tealdi (Heriot-Watt University)
Davide Fiaschi
We develop a theoretical framework to study the effects of hiring subsidies on labour market dynamics in an economy characterized by contract duality and worker heterogeneity. Firms choose among workers differing in skill level and contract type (temporary versus permanent), while labour market flows are governed by transitions between unemployment, temporary employment, and permanent employment. We show that the impact of hiring subsidies on transitions from temporary to permanent employment is shaped by two opposing forces. An incentive effect, driven by the reduction in the cost of permanent contracts, tends to increase conversion rates. However, a composition effect, arising from changes in the relative demand for different worker types, may offset or even dominate this mechanism. As a result, hiring subsidies can generate heterogeneous effects across skill groups and may reduce transition rates for some workers. We illustrate the mechanisms of the model using the 2015 Jobs Act reform, showing how policy design can disproportionately benefit high-skilled workers and produce unintended distributional consequences.