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Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis

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Author Info
Maia Güell
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 dp0461.

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Date of creation: Jul 2000
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Handle: RePEc:cep:cepdps:dp0461

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

References listed on IDEAS
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  1. 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)
  2. 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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(explanations, 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. 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. [Downloadable!]
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  2. Garibaldi, Pietro & Violante, Giovanni L, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Maia Güell, 2001. "Fixed-Term Contracts and the Duration Distribution of Unemployment," CEP Discussion Papers dp0505, Centre for Economic Performance, LSE. [Downloadable!]
  4. Marco Leonardi & Giovanni Pica, 2007. "Employment protection legislation and wages," Working Paper Series 778, European Central Bank. [Downloadable!]
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  5. Alberto Bayo-Moriones & Jose E. Galdon-Sanchez & Maia Güell, 2004. "Is Seniority-Based Pay Used as a Motivation Device? Evidence from Plant Level Data," CEP Discussion Papers dp0646, Centre for Economic Performance, LSE. [Downloadable!]
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  6. Silvio Rendon, 2006. "Job Creation and Investment in Imperfect Capital and Labor Markets," Computing in Economics and Finance 2006 432, Society for Computational Economics. [Downloadable!]
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  7. Matteo, PICCHIO, 2006. "Wage Differentials and Temporary Jobs in Italy," Discussion Papers (ECON - Département des Sciences Economiques) 2006033, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
  8. Damiani, Mirella & Pompei, Fabrizio, 2009. "Labour protection and productivity in the European economies: 1995-2005," MPRA Paper 12710, University Library of Munich, Germany. [Downloadable!]
  9. Dolado, Juan J. & Garcia-Serrano, Carlos & Jimeno, Juan Francisco, 2001. "Drawing Lessons From the Boom of Temporary Jobs in Spain," CEPR Discussion Papers 2884, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Maia Güell & Barbara Petrongolo, 2003. "How Binding are Legal Limits? Transitions from Temporary to Permanent Work in Spain," Economics Working Papers 682, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2005. [Downloadable!]
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  11. Bertil Holmlund & Donald Storrie, 2002. "Temporary Work In Turbulent Times: The Swedish Experience," Economic Journal, Royal Economic Society, vol. 112(480), pages F245-F269, June. [Downloadable!] (restricted)
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  12. Boockmann, Bernhard & Hagen, Tobias, 2005. "Befristete und andere "atypische" Beschäftigungsverhältnisse: Wird der Arbeitsmarkt funktionsfähiger? (Fixed-term and other "atypical" employment relationship : is the labour ma," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 38(2/3), pages 305-324. [Downloadable!]
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