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Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis

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  • Maia Güell

Abstract

I analyze the effects of introducing fixed-term contracts, leaving existing labor market regulations unchanged, on unemployment and labor market segmentation. I use an efficiency wage model in which the firm's choice of contracts and the renewal rate of fixed-term contracts into permanent ones are endogenous. The renewal rate of fixed-term contracts is lower the higher the firing costs of permanent contracts are. Introducing fixed-term contracts can imply higher unemployment even in a world where reducing firing costs would reduce it. Moreover, when the two-tier system does not generate higher employment compared to the system with only permanent contracts, the segmentation of the labor market is socially too large.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 18.

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Date of creation: Jul 2003
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Handle: RePEc:bge:wpaper:18

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Keywords: Fixed-term and permanent contracts; renewal rate; efficiency wage; unemployment;

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  1. César Alonso-Borrego & Jesús Fernández-Villaverde & José E. Galdón-Sánchez, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," Economics Working Papers we042307, Universidad Carlos III, Departamento de Economía.
  2. George A. Akerlof & Lawrence F. Katz, 1988. "Workers' Trust Funds and the Logic of Wage Profiles," NBER Working Papers 2548, National Bureau of Economic Research, Inc.
  3. Maia Güell & Barbara Petrongolo, 2000. "Workers Transitions from Temporary to Permanent Employment: the Spanish Case," CEP Discussion Papers, Centre for Economic Performance, LSE dp0438, Centre for Economic Performance, LSE.
  4. Giuseppe Bertola, 1991. "Labor Turnover Costs and Average Labor Demand," NBER Working Papers 3866, National Bureau of Economic Research, Inc.
  5. Olympia Bover & Pilar García-Perea & Pedro Portugal, 2000. "Labour market outliers: Lessons from Portugal and Spain," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 15(31), pages 379-428, October.
  6. Belot, Michèle & van Ours, Jan C., 2000. "Does the Recent Success of Some OECD Countries in Lowering their Unemployment Rates Lie in the Clever Design of their Labour Market Reform?," IZA Discussion Papers 147, Institute for the Study of Labor (IZA).
  7. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1986, Volume 1, pages 235-290 National Bureau of Economic Research, Inc.
  8. Cabrales, Antonio & Hopenhayn, Hugo A., 1997. "Labor-market flexibility and aggregate employment volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 46(1), pages 189-228, June.
  9. Juan F. Jimeno & Luis Toharia, 1993. "The effects of fixed-term employment on wages: theory and evidence from Spain," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 17(3), pages 475-494, September.
  10. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 1013-1047, June.
  11. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(3), pages 699-726, August.
  12. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  13. Dominique Goux & Eric Maurin & Marianne Pauchet, 1999. "Fixed-term Contracts and the Dynamics of Labour Demand," Working Papers, Centre de Recherche en Economie et Statistique 99-02, Centre de Recherche en Economie et Statistique.
  14. Bentolila, S. & Saint-Paul, G., 1991. "The Macroeconomic Impact of Flexibility Labor Contracts with an Application to Spain," DELTA Working Papers, DELTA (Ecole normale supérieure) 91-22, DELTA (Ecole normale supérieure).
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