causes of the remarkable rise in temporary work. Is the rise driven by changes in labour demand,
labour supply or labour market regulations?
We begin in Section 2 by presenting the institutional setting. Section 3 provides an overview
of the development of temporary work since the late 1980s. We also make use of gross flow data
to portray transitions between various labour market states. In Section 4 we estimate
parsimonious time series models for transition rates and use the estimated equations to simulate
the labour market responses to an adverse macroeconomic shock, focusing in particular on
temporary and permanent employment. We find that a recession triggers an initial decline in
temporary employment followed by a sharp rise from the trough to the end of the recession.
Section 5 of the paper takes stock of alternative explanations of the rise in temporary
employment. We argue that legislative changes have had at most a marginal impact and we find
no evidence that the rise is driven by changes in the composition of the labour force. What
remain, then, are forces affecting firms’ demand for labour. The empirical results indicate that an
adverse macroeconomic shock can trigger a substantial and long-lasting increase in temporary
employment. We argue that adverse macroeconomic conditions give firms stronger incentives to
offer temporary rather than permanent contracts. Moreover, workers will be more willing to
accept temporary jobs in a generally depressed labour market. This idea is broadly consistent
with the observed evolutions of fixed-term contracts in Sweden and other Nordic countries.
2. The Regulation of Fixed-Term Contracts
2.1 Employment Protection in Labour Law
Swedish legislation dates back to the 1974 Employment Protection Act, which is still basically
intact. The law presumes that, unless otherwise stipulated, an employment contract is valid until
further notice. When terminating the contract the employer must provide a valid reason and
advance notice. Compared to many other OECD countries, the periods of notice are lengthy but