Fixed-term contracts and unemployment: an efficiency wage analysis
AbstractDuring 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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Bibliographic InfoPaper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 20181.
Length: 42 pages
Date of creation: Jul 2000
Date of revision:
Unemployment; firing costs; two-tier system; permanent contracts; fixed-term contracts;
Other versions of this item:
- Maia Güell, 2003. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 18, Barcelona Graduate School of Economics.
- Maia Guell, 2000. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 812, Princeton University, Department of Economics, Industrial Relations Section..
- Maia Güell, 2000. "Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis," CEP Discussion Papers dp0461, Centre for Economic Performance, LSE.
- R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
- J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
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