Let’s roll back! The challenging task of regulating temporary contracts

Labour-market dualism remains a persistent feature of many European economies, raising concerns about inequality and segmentation. We study Italy’s 2018 Decreto Dignità, which increased regulatory costs for temporary contracts and narrowed the gap between temporary and permanent employment protection. Using longitudinal Labour Force Survey data, we estimate quarterly flows across several labour-market states and construct a forecast-based counterfactual from pre-reform dynamics. We find a substantial rise in cumulative transitions from temporary to permanent employment and a marked decline in the persistence of temporary contracts. While unemployment falls modestly, transitions into inactivity increase. To interpret these patterns, we calibrate a simple search-and-matching model with temporary and permanent contracts. The quantitative results show that higher renewal costs and shorter contract duration explain most of the shift toward permanent employment. Overall, the findings highlight both the potential and the limits of re-regulating temporary contracts as a tool to reduce labour-market segmentation.