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Fixed-Term and Permanent Employment Contracts: Theory and Evidence

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  • Shutao Cao
  • Enchuan Shao
  • Pedro Silos

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 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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File URL: http://www.bankofcanada.ca/wp-content/uploads/2011/10/wp2011-21.pdf
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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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Keywords: Labour markets; Potential output; Productivity;

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Find related papers by JEL classification:
  • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
  • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
  • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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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 91, Collegio Carlo Alberto.
  2. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute for the Study of Labor (IZA).
  3. 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.
  4. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage bargaining with on-the-job search: theory and evidence," Sciences Po publications info:hdl:2441/dc0ckec3fcb, Sciences Po.
  5. Fernando Alvarez & Marcelo Veracierto, 1999. "Labor market policies in an equilibrium search model," Working Paper Series WP-99-10, Federal Reserve Bank of Chicago.
  6. Cahuc, Pierre & Postel-Vinay, Fabien, 2002. "Temporary jobs, employment protection and labor market performance," Labour Economics, Elsevier, vol. 9(1), pages 63-91, February.
  7. Fernando Alvarez & Marcelo Veracierto, 2005. "Fixed term employment contracts in an equilibrium search model," Working Paper Series WP-05-14, Federal Reserve Bank of Chicago.
  8. 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.
  9. Eckstein, Zvi & van den Berg, Gerard J, 2004. "Empirical Labour Search: A Survey," CEPR Discussion Papers 4199, C.E.P.R. Discussion Papers.
  10. Eckstein, Zvi & Mortensen, Dale T., 2006. "Labor search," European Economic Review, Elsevier, vol. 50(4), pages 807-810, May.
  11. 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.
  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. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
  14. Wasmer, E., 1997. "Competition for Jobs in a Growing Economy and the Emergence of Dualism," DELTA Working Papers 97-13, DELTA (Ecole normale supérieure).
  15. Danielle Venn, 2009. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators," OECD Social, Employment and Migration Working Papers 89, OECD Publishing.
  16. 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.
  17. Renato Faccini, 2008. "Reassessing Labor Market Reforms: Temporary Contracts as a Screening Device," Economics Working Papers ECO2008/27, European University Institute.
  18. Shutao Cao & Danny Leung, 2010. "Stability versus Flexibility: The Role of Temporary Employment in Labour Adjustment," Staff Working Papers 10-27, Bank of Canada.
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Cited by:

  1. 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.
  2. Renato Faccini, 2008. "Reassessing Labor Market Reforms: Temporary Contracts as a Screening Device," Economics Working Papers ECO2008/27, European University Institute.
  3. Charlot, Olivier & Malherbet, Franck, 2013. "Education and employment protection," Labour Economics, Elsevier, vol. 20(C), pages 3-23.
  4. Grassi, Emanuele & Di Cintio, Marco, 2011. "Wage incentive profiles in dual labour markets," MPRA Paper 32266, University Library of Munich, Germany.
  5. Nicolas Lepage-Saucier & Juliette Schleich & Etienne Wasmer, 2013. "Moving Towards a Single Labour Contract: Pros, Cons and Mixed Feelings," OECD Economics Department Working Papers 1026, OECD Publishing.
  6. Pierre Cahuc & Olivier Charlot & Franck Malherbet, 2014. "Explaining the Spread of Temporary Jobs and its Impact on Labor Turnover," 2014 Meeting Papers 906, Society for Economic Dynamics.
  7. Elsayyad, May & Konrad, Kai A., 2012. "Fighting Multiple Tax Havens," Munich Reprints in Economics 13964, University of Munich, Department of Economics.
  8. Tealdi, Cristina, 2011. "How do employment contract reforms affect welfare? Theory and evidence," MPRA Paper 33573, University Library of Munich, Germany.

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