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Fixed-Term and Permanent Employment Contracts: Theory and Evidence

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  • Pedro Silos

    (Federal Reserve Bank of Atlanta)

  • Enchuan Shao

    (Bank of Canada)

  • Shutao Cao

    (Bank of Canada)

Abstract

This paper constructs a theory of the coexistence of fixed-term and permanent employment contracts in an environment with ex-ante identical workers and employers. Workers under fixed-term contracts can be dismissed at no cost while permanent employees enjoy labor protection. In a labor market characterized by search and matching frictions, firms find it optimal to discriminate by offering some workers a fixed-term contract while offering other workers a permanent contract. Match-specific quality between a worker and a firm determines the type of contract offered. We analytically characterize the firmâs hiring and firing rules. Using matched employer-employee data from Canada, we estimate the modelâs parameters. The effects of firing costs on wage inequality vary dramatically depending on whether search externalities are taken or not into account.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 872.

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Date of creation: 2011
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Handle: RePEc:red:sed011:872

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  1. Christopher Flinn & James Mabli, 2008. "On-the-Job Search, Minimum Wages, and Labor Market Outcomes in an Equilibrium Bargaining Framework," Carlo Alberto Notebooks, Collegio Carlo Alberto 91, Collegio Carlo Alberto.
  2. Danielle Venn, 2009. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators," OECD Social, Employment and Migration Working Papers 89, OECD Publishing.
  3. Eric F. Smith, 2007. "Limited Duration Employment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 444-471, July.
  4. O Blanchard & A Landier, 2002. "The Perverse Effects of Partial Labour Market Reform: fixed--Term Contracts in France," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(480), pages F214-F244, June.
  5. Eckstein, Zvi & van den Berg, Gerard J, 2004. "Empirical Labour Search: A Survey," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4199, C.E.P.R. Discussion Papers.
  6. Renato Faccini, 2008. "Reassessing Labor Market Reforms: Temporary Contracts as a Screening Device," Economics Working Papers, European University Institute ECO2008/27, European University Institute.
  7. Etienne Wasmer, 1997. "Competition for Jobs in a Growing Economy and the Emergence of Dualism," Working Papers, Centre de Recherche en Economie et Statistique 97-15, Centre de Recherche en Economie et Statistique.
  8. César Alonso-Borrego & Jesús Fernández-Villaverde & José E. Galdón-Sánchez, 2005. "Evaluating Labor Market Reforms: A General Equilibrium Approach," NBER Working Papers 11519, National Bureau of Economic Research, Inc.
  9. Cahuc, Pierre & Postel-Vinay, Fabien, 2002. "Temporary jobs, employment protection and labor market performance," Labour Economics, Elsevier, Elsevier, vol. 9(1), pages 63-91, February.
  10. Fernando Alvarez & Marcelo Veracierto, 1999. "Labor market policies in an equilibrium search model," Working Paper Series, Federal Reserve Bank of Chicago WP-99-10, Federal Reserve Bank of Chicago.
  11. Mariano Bosch & Julen Esteban-Pretel, 2009. "Cyclical Informality and Unemployment," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-613, CIRJE, Faculty of Economics, University of Tokyo.
  12. Bontemps, Christian & Robin, Jean-Marc & Van den Berg, Gerard J, 1999. "An Empirical Equilibrium Job Search Model with Search on the Job and Heterogeneous Workers and Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 1039-74, November.
  13. Fernando Alvarez & Marcelo Veracierto, 2005. "Fixed term employment contracts in an equilibrium search model," Working Paper Series, Federal Reserve Bank of Chicago WP-05-14, Federal Reserve Bank of Chicago.
  14. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  15. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2003. "Wage bargaining with on-the-job search : theory and evidence," Research Unit Working Papers, Laboratoire d'Economie Appliquee, INRA 0212, Laboratoire d'Economie Appliquee, INRA.
  16. Eckstein, Zvi & Mortensen, Dale T., 2006. "Labor search," European Economic Review, Elsevier, Elsevier, vol. 50(4), pages 807-810, May.
  17. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, Elsevier, vol. 115(2), pages 293-346, August.
  18. Shutao Cao & Danny Leung, 2010. "Stability versus Flexibility: The Role of Temporary Employment in Labour Adjustment," Working Papers, Bank of Canada 10-27, Bank of Canada.
  19. Eckstein, Zvi & Wolpin, Kenneth I, 1990. "Estimating a Market Equilibrium Search Model from Panel Data on Individuals," Econometrica, Econometric Society, Econometric Society, vol. 58(4), pages 783-808, July.
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Cited by:
  1. May Elsayyad & Kai A. Konrad, 2010. "Fighting Multiple Tax Havens," CESifo Working Paper Series 3195, CESifo Group Munich.
  2. Cahuc, Pierre & Charlot, Olivier & Malherbet, Franck, 2012. "Explaining the Spread of Temporary Jobs and its Impact on Labor Turnover," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8864, C.E.P.R. Discussion Papers.
  3. Tealdi, Cristina, 2011. "How do employment contract reforms affect welfare? Theory and evidence," MPRA Paper 33573, University Library of Munich, Germany.
  4. Charlot, Olivier & Malherbet, Franck, 2013. "Education and employment protection," Labour Economics, Elsevier, Elsevier, vol. 20(C), pages 3-23.
  5. David Amirault & Paul Fenton & Thérèse Laflèche, 2013. "Asking About Wages: Results from the Bank of Canada’s Wage Setting Survey of Canadian Companies," Discussion Papers 13-1, Bank of Canada.

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