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 Princeton University, Department of Economics, Industrial Relations Section. in its series Working Papers with number 812.
Date of creation: Mar 2000
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fixed-term contracts; permanent contracts; renewal rate; efficiency wage; unemployment;
Other versions of this item:
- Maia Guell, 2000. "Fixed-term contracts and unemployment: an efficiency wage analysis," LSE Research Online Documents on Economics 20181, London School of Economics and Political Science, LSE Library.
- Maia Güell, 2000. "Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis," CEP Discussion Papers dp0461, Centre for Economic Performance, LSE.
- Maia Güell, 2003. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 18, Barcelona Graduate School of Economics.
- O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
- O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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