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Fixed-Term Contracts in Europe: A Reassessment in Light of the Importance of Match-Specific Learning

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  • Eva Nagypal

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    (Department of Economics, Northwestern University)

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    Abstract

    The use of fixed-term contracts has proliferated during the past decade in many European countries due to the relaxation of their regulation. Policymakers aimed to reduce labor-market rigidities by offering to firms these flexible contracts with little or no dismissal costs but with a finite contract length. The analysis of these contracts has thus far focused on their effect on the overall employment rate. This study high-lights that in the evaluation of fixed-term contracts as policy instruments it is also important to look at their effect on productivity as a function of tenure and on the tenure distribution of employed workers. These two effects jointly determine the policy's overall productivity effect. I show that the liberalization of fixed-term contracts can have a significant effect on the productivity of employment relationships when match-specific learning is important. Moreover, the effect is different depending on the assumption about the nature of the learning process. I distinguish between two kinds of match-specific learning - learning-by-doing and learning about match quality - and show that under learning-by-doing the overall productivity effect is necessarily negative, while under learning about match quality the effect could be either negative or positive depending on how much experimentation improves in the presence of fixed-term contracts. I calibrate the model based on earlier empirical work and find that indeed the productivity effect is positive as output per worker increases by 0.6%.

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    File URL: http://econ.core.hu/doc/dp/dp/nagypal.pdf
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    Bibliographic Info

    Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0110.

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    Length: 29 pages
    Date of creation: Jun 2001
    Date of revision:
    Handle: RePEc:has:discpr:0110

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    1. Olivier Blanchard & Augustin Landier, 2001. "The Perverse Effects of Partial Labor Market Reform: Fixed Duration Contracts in France," NBER Working Papers 8219, National Bureau of Economic Research, Inc.
    2. Boyan Jovanovic & Yaw Nyarko, 1994. "The Transfer of Human Capital," NBER Working Papers 4823, National Bureau of Economic Research, Inc.
    3. Victor Aguirregabiria & Cesar Alonso-Borrego, 2009. "Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain," Working Papers tecipa-346, University of Toronto, Department of Economics.
    4. Farber, Henry S, 1994. "The Analysis of Interfirm Worker Mobility," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 12(4), pages 554-93, October.
    5. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
    6. 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.
    7. Topel, Robert H, 1991. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(1), pages 145-76, February.
    8. 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.
    9. 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.
    10. Farber, Henry S., 1999. "Mobility and stability: The dynamics of job change in labor markets," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 37, pages 2439-2483 Elsevier.
    11. Serrano, Carlos Garcia, 1998. "Worker Turnover and Job Reallocation: The Role of Fixed-Term Contracts," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 709-25, October.
    12. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, Elsevier, vol. 35(1), pages 19-25, February.
    13. Brewster, Chris & Mayne, Lesley & Tregaskis, Olga, 1997. "Flexible working in Europe," Journal of World Business, Elsevier, Elsevier, vol. 32(2), pages 133-151, July.
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