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Employment fluctuations in a dual labor market

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Author Info

  • James Costain

    () (Banco de España)

  • Juan F. Jimeno

    () (Banco de España)

  • Carlos Thomas

    () (Banco de España)

Abstract

In light of the huge cross-country differences in job losses during the recent crisis, we study how labor market duality - meaning the coexistence of "temporary" contracts with low firing costs and "permanent" contracts with high firing costs - affects labor market volatility. In a model of job creation and destruction based on Mortensen and Pissarides (1994), we show that a labor market with these two contract types is more volatile than an otherwise-identical economy with a single contract type. Calibrating our model to Spain, we find that unemployment fluctuates 21% more under duality than it would in a unified economy with the same average firing cost, and 33% more than it would in a unified economy with the same average unemployment rate. In our setup, employment grows gradually in booms, due to matching frictions, whereas the onset of a recession causes a burst of firing of "fragile" low-productivity jobs. Unlike permanent jobs, some newly-created temporary jobs are already near the firing margin, which makes temporary jobs more likely to be fragile and means they play a disproportionate role in employment fluctuations. Unifying the labor market makes all jobs behave more like the permanent component of the dual economy, and therefore decreases volatility. Unfortunately, it also raises unemployment; to avoid this, unification must be accompanied by a decrease in the average level of firing costs. Finally, we confirm that factors like unemployment benefits and wage rigidity also have a large, interacting effect on labor market volatility; in particular, higher unemployment benefits increase the impact of duality on volatility.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/10/Fic/dt1013e.pdf
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Bibliographic Info

Paper provided by Banco de España in its series Banco de España Working Papers with number 1013.

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Length: 67 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:bde:wpaper:1013

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Web page: http://www.bde.es/
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Related research

Keywords: firing costs; temporary jobs; unemployment volatility; matching model; endogenous separation;

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  1. El paro de agosto y otros â??abusosâ?
    by Florentino Felgueroso in Nada Es Gratis on 2011-09-02 07:43:27
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Cited by:
  1. Philip, Jung & Moritz, Kuhn, 2011. "The Era of the U.S.-Europe Labor Market Divide: What can we learn?," MPRA Paper 32322, University Library of Munich, Germany.
  2. Anita Wölfl & Juan S. Mora-Sanguinetti, 2011. "Reforming the Labour Market in Spain," OECD Economics Department Working Papers 845, OECD Publishing.
  3. Bentolila, Samuel & Cahuc, Pierre & Dolado, Juan José & Le Barbanchon, Thomas, 2010. "Two-Tier Labor Markets in the Great Recession: France vs. Spain," IZA Discussion Papers 5340, Institute for the Study of Labor (IZA).
  4. Görg, Holger & Görlich, Dennis, 2012. "Offshoring, Wages and Job Security of Temporary Workers," IZA Discussion Papers 6897, Institute for the Study of Labor (IZA).
  5. Bentolila, Samuel & Jimeno, Juan Francisco. & Dolado, Juan José, 2012. "Reforming an Insider-Outsider Labor Market: The Spanish Experience," Working Papers 2012-01, FEDEA.
  6. Güell, Maia & Rodríguez Mora, José Vicente, 2010. "Temporary Contracts, Incentives and Unemployment," CEPR Discussion Papers 8116, C.E.P.R. Discussion Papers.
  7. Cahuc, Pierre & Charlot, Olivier & Malherbet, Franck, 2012. "Explaining the Spread of Temporary Jobs and its Impact on Labor Turnover," IZA Discussion Papers 6365, Institute for the Study of Labor (IZA).
  8. Holger Görg & Dennis Görlich, 2012. "Offshoring, Wages and Job Security of Temporary Workers," Kiel Working Papers 1797, Kiel Institute for the World Economy.
  9. Gete, Pedro & Porchia, Paolo, 2011. "A real options analysis of dual labor markets and the single labor contract," MPRA Paper 34055, University Library of Munich, Germany.
  10. Schwarzmüller, Tim & Stähler, Nikolai, 2011. "Reforming the labor market and improving competitiveness: An analysis for Spain using FiMod," Discussion Paper Series 1: Economic Studies 2011,28, Deutsche Bundesbank, Research Centre.
  11. Pedro Gete and Paolo Porchia, 2011. "A Real Options Analysis of Dual Labor Markets and the Single Labor Contract," Working Papers gueconwpa~11-11-02, Georgetown University, Department of Economics.
  12. Bart Hobijn & Aysegül Sahin, 2012. "Beveridge curve shifts across countries since the Great Recession," Working Paper Series 2012-24, Federal Reserve Bank of San Francisco.
  13. J. Ignacio García Pérez & Victoria Osuna, 2012. "Dual Labour Markets and the Tenure Distribution: Reducing Severance Pay or Introducing a Single Contract?," Working Papers 2012-09, FEDEA.
  14. Holger Görg & Dennis Görlich, 2012. "Offshoring, Wages and Job Security of Temporary Workers," SOEPpapers on Multidisciplinary Panel Data Research 512, DIW Berlin, The German Socio-Economic Panel (SOEP).

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