JournalofProductivityAnalysis,20,121–142,2003 # 2003KluwerAcademicPublishers.ManufacturedinTheNetherlands. The Productivity Slowdown, Sectoral Reallocations and the Growth of Atypical Employment Arrangements E.MAGNANI E.Magnani@unsw.edu.au Elisabetta Magnani, School of Economics, the University of New South Wales, Kensington, NSW 2052, Australia Abstract Thispaperexplorestherecentshiftsinemploymentarrangementsawayfromlong- termemploymentcontractsandinternallabormarketstowardsoutsidecontracting oflaborinOECDcountries.Itexaminesthedrivingforcesbehindthisphenomenon, focusingontherelationshipwithanotherimportanttrendofthelastfewdecades, namely the labor productivity slowdown. A comparison of U.S. and European institutional arrangements shows how very different labor markets have recently displayed similar patterns in the use of contracted out labor. This paper explains these similarities and reconciles them with very different patterns in hiring, firing, andquittingbehaviorobservedinthetworegions. JEL Classification: E2,J6,L6 Keywords: alternativeemploymentarrangements,mobility,productivity,technology,institutionalfactors It is well documented that the industrial shift from manufacturing to trade and services has prompted deep labor market adjustments in most OECD countries. Startingfromtheearly1970stheuseofalternativeemploymentarrangements,such as temporary labor, subcontracting and contracting-out, has been growing in all major industrialized countries, including the U.S., European nations, Canada and Australia (Segal and Sullivan, 1997; Abraham and Taylor, 1996; Heisz, 1996; Wooden and VandenHeuvel, 1996; Blanchard et al., 1995; Bentolila and Dolado, 1994; Grubb and Wells, 1993; Appelbaum and Schettkat, 1990; Abraham, 1989). The timing of these changes is important as it coincides with the beginning of a significant slowdown of productivity growth in the ‘‘observable’’ sector of OECD economiesfollowingthefirstoilshockin1973andtwodecadesofhighproductivity growthinthe1950sand1960s(Griliches,1980;Madison,1997). The shift in employment arrangements away from long-term employment contracts and internal labor markets towards outside contracting of labor has occurredineconomicsystemswithverydifferentinstitutionalarrangements.Inthe U.S.wherethereturnsfrombeinginvoluntarilydismissedarelowandevennegative,