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Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis

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  • Maia Güell

Abstract

During 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.

Suggested Citation

  • Maia Güell, 2000. "Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis," CEP Discussion Papers dp0461, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0461
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    Cited by:

    1. Vasileios Gkionakis, 2004. "Short Job Tenures and Firing Taxes in the Search Theory of Unemployment," CEP Discussion Papers dp0628, Centre for Economic Performance, LSE.
    2. Guell, Maia & Petrongolo, Barbara, 2007. "How binding are legal limits? Transitions from temporary to permanent work in Spain," Labour Economics, Elsevier, vol. 14(2), pages 153-183, April.
    3. Lawrence M. Kahn, 2007. "The Impact of Employment Protection Mandates on Demographic Temporary Employment Patterns: International Microeconomic Evidence," Economic Journal, Royal Economic Society, vol. 117(521), pages 333-356, June.
    4. Gail Pacheco & Bill Cochrane, 2015. "Decomposing the temporary-permanent wage gap in New Zealand," Working Papers 2015-07, Auckland University of Technology, Department of Economics.
    5. Juan J Dolado & Carlos Garcia--Serrano & Juan F. Jimeno, 2002. "Drawing Lessons From The Boom Of Temporary Jobs In Spain," Economic Journal, Royal Economic Society, vol. 112(721), pages 270-295, June.
    6. Alberto Bayo-Moriones & Jose E. Galdon-Sanchez & Maia Güell, 2010. "Is seniority-based pay used as a motivational device? Evidence from plant-level data," Research in Labor Economics, in: Solomon W. Polachek & Konstantinos Tatsiramos (ed.), Jobs, Training, and Worker Well-being, volume 30, pages 155-187, Emerald Publishing Ltd.
    7. Marco Leonardi & Giovanni Pica, 2013. "Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation," Economic Journal, Royal Economic Society, vol. 123(12), pages 1236-1278, December.
    8. Sílvio Rendon, 2004. "Job Creation and Investment in Imperfect Capital and Labor Markets," Economic Working Papers at Centro de Estudios Andaluces E2004/35, Centro de Estudios Andaluces.
    9. Damiani, Mirella & Pompei, Fabrizio, 2009. "Labour protection and productivity in the European economies: 1995-2005," MPRA Paper 12710, University Library of Munich, Germany.
    10. Boockmann, Bernhard & Hagen, Tobias, 2005. "Befristete und andere "atypische" Beschäftigungsverhältnisse: Wird der Arbeitsmarkt funktionsfähiger? (Fixed-term and other "atypical" employment relationship : is the labour marke," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 38(2/3), pages 305-324.
    11. Victor Aguirregabiria & Cesar Alonso-Borrego, 2014. "Labor Contracts And Flexibility: Evidence From A Labor Market Reform In Spain," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 930-957, April.
    12. Marco Leonardi & Giovanni Pica, 2007. "Employment Protection Legislation and Wages," CSEF Working Papers 175, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    13. Maia Güell, 2001. "Fixed-Term Contracts and the Duration Distribution of Unemployment," CEP Discussion Papers dp0505, Centre for Economic Performance, LSE.
    14. Ferreira, Maria & de Grip, Andries & van der Velden, Rolf, 2018. "Does informal learning at work differ between temporary and permanent workers? Evidence from 20 OECD countries," Labour Economics, Elsevier, vol. 55(C), pages 18-40.
    15. Koutentakis, Franciscos, 2008. "The effect of temporary contracts on job security of permanent workers," Economics Letters, Elsevier, vol. 101(3), pages 220-222, December.
    16. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute of Labor Economics (IZA).
    17. Bertil Holmlund & Donald Storrie, 2002. "Temporary Work In Turbulent Times: The Swedish Experience," Economic Journal, Royal Economic Society, vol. 112(480), pages 245-269, June.
    18. Dolado, Juan J. & Stucchi, Rodolfo, 2008. "Do Temporary Contracts Affect TFP? Evidence from Spanish Manufacturing Firms," IZA Discussion Papers 3832, Institute of Labor Economics (IZA).
    19. Garibaldi, Pietro & Violante, Giovanni L, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
    20. Matteo, PICCHIO, 2006. "Wage Differentials and Temporary Jobs in Italy," Discussion Papers (ECON - Département des Sciences Economiques) 2006033, Université catholique de Louvain, Département des Sciences Economiques.
    21. Perugini, Cristiano & Pompei, Fabrizio, 2017. "Temporary Jobs, Institutions, and Wage Inequality within Education Groups in Central-Eastern Europe," World Development, Elsevier, vol. 92(C), pages 40-59.

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    More about this item

    Keywords

    Unemployment; firing costs; two-tier system; permanent contracts; fixed-term contracts;
    All these keywords.

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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