Keywords: wage differentials, labour contracts, insider outsider theory
The paper shows evidence about the effect of labour contracts flexibility on wage differential between fixed term and permanent contracts in Italy. We use data from the Eurostat "European Community Households Panel" (ECHP) for 1995-2001. The time span considered represents both the situation before and that after the labour market reform aimed at promoting the diffusion of more flexible contractual arrangements (law n. 196/1997, known as "Pacchetto Treu"). We find that workers employed under fixed term contracts earn lower wages than their permanent contracts counterparts. This is not due to different characteristics of the two groups of workers as the wage differential persists even after controlling for observable and unobservable workers characteristics. However, the wage differential decreases considerably over time as labour market flexibility spreads. We argue that the results are consistent with the hypothesis that permanent workers are insiders in the labour market and that the wage differential reflects their bargaining power. As more competition is injected in the market thanks to the more flexible contractual forms the market power of the insiders shrinks closing the wage gap.