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Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis

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Author Info
M Guell

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Abstract

During the 1980s, many European countries introduced fixed-term contracts to fight high and persistent levels of unemployment. Although these contracts have been widely used, unemployment has remained about the same after fifteen years. This paper builds a theoretical model to reconcile these facts. We analyse the labour market effect of the introduction of fixed-term contracts and the firm’s choice of contracts are studied. Permanent contracts are the standard way to offer incentives, but fixed-term contracts are cheaper. This generates an externality, which can make employment higher in the system with only permanent contracts. As a consequence, from a social point of view, the share of fixed-term contracts is too large. Increases in the renewal rate of fixed-term contracts into permanent contracts lead to higher employment levels. Finally, the model highlights the interactions between different rigidities in the labour market. Aggregate employment and the share of temporary contracts are affected in the same way by the firing costs and the flexibility of wages.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number 0461.

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Date of creation: Jul 2000
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Handle: RePEc:cep:cepdps:0461

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Related research
Keywords: Unemployment firing costs two-tier system permanent contracts fixed-term contracts

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. C Bean, 1992. "European Unemployment: A Survey," CEP Discussion Papers 071, Centre for Economic Performance, LSE.
    Other versions:
  2. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August. [Downloadable!] (restricted)
  3. Bentolila, Samuel & Saint-Paul, Gilles, 1994. "A model of labor demand with linear adjustment costs," Labour Economics, Elsevier, vol. 1(3-4), pages 303-326, September. [Downloadable!] (restricted)
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  4. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  5. R Jackman & R Layard & S.J Nickell, 1996. "Combatting Unemployment: Is Flexibility Enough?," CEP Discussion Papers 0293, Centre for Economic Performance, LSE. [Downloadable!]
  6. M Guell, 2000. "Employment Protection and Unemployment in an Efficiency Wage Model," CEP Discussion Papers 0463, Centre for Economic Performance, LSE. [Downloadable!]
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  7. George A. Akerlof & Lawrence F. Katz, 1989. "Workers' Trust Funds and the Logic of Wage Profiles," NBER Working Papers 2548, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 381-402, July. [Downloadable!] (restricted)
  9. Bertola, Giuseppe, 1992. "Labor Turnover Costs and Average Labor Demand," Journal of Labor Economics, University of Chicago Press, vol. 10(4), pages 389-411, October. [Downloadable!] (restricted)
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  10. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Working Papers 1906, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. S.J Nickell & R Layard, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers 0407, Centre for Economic Performance, LSE.
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  12. Goux, Dominique & Maurin, Eric & Pauchet, Marianne, 2001. "Fixed-term contracts and the dynamics of labour demand," European Economic Review, Elsevier, vol. 45(3), pages 533-552, March. [Downloadable!] (restricted)
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  13. M Guell-Rotllan & B Petrongolo, 2000. "Workers' Transitions from Temporary to Permanent Employment: the Spanish Case," CEP Discussion Papers 0438, Centre for Economic Performance, LSE.
  14. Cabrales, Antonio & Hopenhayn, Hugo A., 1997. "Labor-market flexibility and aggregate employment volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46, pages 189-228, June. [Downloadable!] (restricted)
  15. repec:fth:prinin:432 is not listed on IDEAS
  16. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, vol. 36(5), pages 1013-1047, June. [Downloadable!] (restricted)
  17. Nickell, S J, 1978. "Fixed Costs, Employment and Labour Demand over the Cycle," Economica, London School of Economics and Political Science, vol. 45(180), pages 329-45, November. [Downloadable!] (restricted)
  18. Alba-Ramirez, Alfonso, 1994. "Formal Training, Temporary Contracts, Productivity and Wages in Spain," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(2), pages 151-70, May.
  19. Juan F. Jimeno & Luis Toharia, 1993. "The effects of fixed-term employment on wages: theory and evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 475-494, September. [Downloadable!]
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