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Fixed-Term and Permanent Employment Contracts: Theory and Evidence

  • Shutao Cao
  • Enchuan Shao
  • Pedro Silos

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 fixedterm 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 firm’s hiring and firing rules. Using matched employer-employee data from Canada, we estimate the model’s parameters. Increasing the level of firing costs increases wage inequality and decreases the unemployment rate. The increase in inequality results from a larger fraction of temporary workers and not from an increase in the wage premium earned by permanent workers.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 11-21.

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Length: 38 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bca:bocawp:11-21
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  1. Renato Faccini, 2008. "Reassessing Labor Market Reforms: Temporary Contracts as a Screening Device," Economics Working Papers ECO2008/27, European University Institute.
  2. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2003. "Wage bargaining with on-the-job search : theory and evidence," Research Unit Working Papers 0212, Laboratoire d'Economie Appliquee, INRA.
  3. Eckstein, Zvi & Wolpin, Kenneth I, 1990. "Estimating a Market Equilibrium Search Model from Panel Data on Individuals," Econometrica, Econometric Society, vol. 58(4), pages 783-808, July.
  4. Eckstein, Zvi & van den Berg, Gerard J, 2004. "Empirical Labour Search: A Survey," CEPR Discussion Papers 4199, C.E.P.R. Discussion Papers.
  5. Cahuc, Pierre & Postel-Vinay, Fabien, 2001. "Temporary Jobs, Employment Protection and Labor Market Performance," IZA Discussion Papers 260, Institute for the Study of Labor (IZA).
  6. Fernando Alvarez & Marcelo Veracierto, 2006. "Fixed-Term Employment Contracts in an Equilibrium Search Model," NBER Working Papers 12791, National Bureau of Economic Research, Inc.
  7. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
  8. Alonso-Borrego, César & Galdón Sánchez, José E. & Fernández Villaverde, Jesús, 2004. "Evaluating labor market reforms : a general equilibrium approach," UC3M Working papers. Economics we042307, Universidad Carlos III de Madrid. Departamento de Economía.
  9. Christopher Flinn & James Mabli, 2008. "On-the-Job Search, Minimum Wages, and Labor Market Outcomes in an Equilibrium Bargaining Framework," Carlo Alberto Notebooks 91, Collegio Carlo Alberto.
  10. Christian Bontemps & Jean-Marc Robin & Gérard J. Van den Berg, 1999. "An Empirical Equilibrium Job Search Model With Search on the Job and Heterogeneous Workers and Firms," Post-Print hal-00357757, HAL.
  11. E Wasmer, 1997. "Competition for Jobs in a Growing Economy and the Emergence of Dualism," CEP Discussion Papers dp0369, Centre for Economic Performance, LSE.
  12. O Blanchard & A Landier, 2002. "The Perverse Effects of Partial Labour Market Reform: fixed--Term Contracts in France," Economic Journal, Royal Economic Society, vol. 112(480), pages F214-F244, June.
  13. Shutao Cao & Danny Leung, 2010. "Stability versus Flexibility: The Role of Temporary Employment in Labour Adjustment," Staff Working Papers 10-27, Bank of Canada.
  14. Danielle Venn, 2009. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators," OECD Social, Employment and Migration Working Papers 89, OECD Publishing.
  15. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
  16. Fernando Alvarez & Marcelo Veracierto, 2000. "Labor-Market Policies in an Equilibrium Search Model," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 265-316 National Bureau of Economic Research, Inc.
  17. 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.
  18. Eckstein, Zvi & Mortensen, Dale T., 2006. "Labor search," European Economic Review, Elsevier, vol. 50(4), pages 807-810, May.
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