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Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis

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Listed author(s):
  • Maia Güell

Abstract

I analyze the effects of introducing fixed-term contracts, leaving existing labor market regulations unchanged, on unemployment and labor market segmentation. I use an efficiency wage model in which the firm's choice of contracts and the renewal rate of fixed-term contracts into permanent ones are endogenous. The renewal rate of fixed-term contracts is lower the higher the firing costs of permanent contracts are. Introducing fixed-term contracts can imply higher unemployment even in a world where reducing firing costs would reduce it. Moreover, when the two-tier system does not generate higher employment compared to the system with only permanent contracts, the segmentation of the labor market is socially too large.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 18.

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Date of creation: Jul 2003
Handle: RePEc:bge:wpaper:18
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Keywords: Fixed-term and permanent contracts; renewal rate; efficiency wage; unemployment;

Other versions of this item:

Find related papers by JEL classification:
  • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
  • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
  • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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  1. Michèle Belot & Jan C. van Ours, 2004. "Does the recent success of some OECD countries in lowering their unemployment rates lie in the clever design of their labor market reforms?," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 621-642, October.
  2. Goux, Dominique & Maurin, Eric & Pauchet, Marianne, 2001. "Fixed-term contracts and the dynamics of labour demand," European Economic Review, Elsevier, vol. 45(3), pages 533-552, March.
  3. 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).
  4. Bertola, Giuseppe, 1992. "Labor Turnover Costs and Average Labor Demand," Journal of Labor Economics, University of Chicago Press, vol. 10(4), pages 389-411, October.
  5. Maia Güell & Barbara Petrongolo, 2000. "Workers Transitions from Temporary to Permanent Employment: the Spanish Case," CEP Discussion Papers dp0438, Centre for Economic Performance, LSE.
  6. Lawrence F. Katz, 1986. "Efficiency Wage Theories: A Partial Evaluation," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 235-290 National Bureau of Economic Research, Inc.
  7. George A. Akerlof & Lawrence F. Katz, 1989. "Workers' Trust Funds and the Logic of Wage Profiles," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 525-536.
  8. Bentolila, S. & Saint-Paul, G., 1991. "The Macroeconomic Impact of Flexibility Labor Contracts with an Application to Spain," DELTA Working Papers 91-22, DELTA (Ecole normale supérieure).
  9. Cabrales, Antonio & Hopenhayn, Hugo A., 1997. "Labor-market flexibility and aggregate employment volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46(1), pages 189-228, June.
  10. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, vol. 36(5), pages 1013-1047, June.
  11. Olympia Bover & Pilar García-Perea & Pedro Portugal, 2000. "Labour market outliers: Lessons from Portugal and Spain," Economic Policy, CEPR;CES;MSH, vol. 15(31), pages 379-428, October.
  12. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
  13. 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.
  14. Juan F. Jimeno & Luis Toharia, 1993. "The effects of fixed-term employment on wages: theory and evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 475-494, September.
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