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Fixed term employment contracts in an equilibrium search model

Author

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  • Fernando Alvarez
  • Marcelo Veracierto

Abstract

Fixed term employment contracts have been introduced in number of European countries as a way to provide flexibility to economies with high employment protection levels. We introduce these contracts into the equilibrium search model in Alvarez and Veracierto (1999), a version of the Lucas and Prescott island model, adapted to have undirected search and variable labor force participation. We model a contract of length J as a tax on separations of workers with tenure higher than J. We show a version of the welfare theorems, and characterize the efficient allocations. This requires solving a control problem, whose solution is characterized by two dimensional inaction sets. For J = 1 these contracts are equivalent to the case of firing taxes, and for large J they are equivalent to the laissez- faire case. In a calibrated version of the model, we evaluate to what extent contract lengths similar to those observed in Europe, close the gap between these two extremes.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedhwp:wp-05-14
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Marcelo Veracierto, 2007. "Establishments dynamics and matching frictions in classical competitive equilibrium," Working Paper Series WP-07-16, Federal Reserve Bank of Chicago.
    2. Shutao Cao & Enchuan Shao & Pedro Silos, 2010. "Fixed-term and permanent employment contracts: theory and evidence," FRB Atlanta Working Paper 2010-13, Federal Reserve Bank of Atlanta.
    3. Yang, Guanyi, 2017. "General Equilibrium Evaluation of Temporary Employment," MPRA Paper 80047, University Library of Munich, Germany.
    4. 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.
    5. Davis, Morris A. & Fisher, Jonas D. M. & Veracierto, Marcelo, 2013. "Gross Migration, Housing and Urban Population Dynamics," Working Paper Series WP-2013-19, Federal Reserve Bank of Chicago.
    6. repec:spr:jeicoo:v:12:y:2017:i:1:d:10.1007_s11403-015-0148-6 is not listed on IDEAS
    7. Veracierto, Marcelo, 2007. "On the short-run effects of labor market reforms," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1213-1229, May.
    8. Coen-Pirani, Daniele, 2010. "Understanding gross worker flows across U.S. states," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 769-784, October.
    9. repec:eee:labeco:v:46:y:2017:i:c:p:26-46 is not listed on IDEAS
    10. Lalé, Etienne, 2017. "Worker reallocation across occupations: Confronting data with theory," Labour Economics, Elsevier, vol. 44(C), pages 51-68.
    11. Alvarez, Fernando & Veracierto, Marcelo, 2012. "Fixed-term employment contracts in an equilibrium search model," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1725-1753.

    More about this item

    Keywords

    Labor contract ; Employment (Economic theory);

    JEL classification:

    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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