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Fixed term employment contracts in an equilibrium search model

Listed author(s):
  • Fernando Alvarez
  • Marcelo Veracierto

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.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-05-14.

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Date of creation: 2005
Handle: RePEc:fip:fedhwp:wp-05-14
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  1. Veracierto, Marcelo, 2008. "On the cyclical behavior of employment, unemployment and labor force participation," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1143-1157, September.
  2. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
  3. 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.
  4. Alonso-Borrego, César & Aguirregabiria, Víctor, 1999. "Labor contracts and flexibility : evidence from a labor markt reform in Spain," DES - Working Papers. Statistics and Econometrics. WS 6302, Universidad Carlos III de Madrid. Departamento de Estadística.
  5. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
  6. 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.
  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. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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  11. Güell, Maia & Petrongolo, Barbara, 2003. "How Binding Are Legal Limits? Transitions from Temporary to Permanent Work in Spain," IZA Discussion Papers 782, Institute for the Study of Labor (IZA).
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  29. 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.
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  31. 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 214-244, June.
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