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Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis

Author

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  • Maia Guell

    (Princeton University and Universitat Pompeu Fabra)

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 remains about the same after fifteen years. This paper builds a theoretical model to reconcile these facts. I analyze the labor market effect of the introduction of fixed-term contracts in an efficiency wage model. The form of incentive compatible 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. The model highlights the interaction between different rigidities in the labor market. Aggregate employment and the share of temporary contracts are affected in the same way by firing costs and the flexibility of wages.

Suggested Citation

  • Maia Guell, 2000. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 812, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:433
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    Citations

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    Cited by:

    1. Gilles Saint-Paul, 2004. "Why are European Countries Diverging in their Unemployment Experience?," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 49-68, Fall.
    2. J. Ignacio García-Pérez & Yolanda F. Rebollo Sanz, 2009. "The use of permanent contracts across Spanish regions: Do regional wage subsidies work?," Investigaciones Economicas, Fundación SEPI, vol. 33(1), pages 97-130, January.
    3. 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.
    4. Karabchuk Tatiana, 2009. "Determinants of temporary employment for men and women in Russia," EERC Working Paper Series 09/11e, EERC Research Network, Russia and CIS.
    5. 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.
    6. 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.
    7. Maia Güell, 2001. "Fixed-Term Contracts and the Duration Distribution of Unemployment," CEP Discussion Papers dp0505, Centre for Economic Performance, LSE.
    8. Tatiana Karabchuk & Natalia Soboleva, 2020. "Temporary Employment, Informal Work and Subjective Well-Being Across Europe: Does Labor Legislation Matter?," Journal of Happiness Studies, Springer, vol. 21(5), pages 1879-1901, June.
    9. 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.
    10. Koutentakis, Franciscos, 2008. "The effect of temporary contracts on job security of permanent workers," Economics Letters, Elsevier, vol. 101(3), pages 220-222, December.
    11. 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.
    12. Simona COMI & Mara GRASSENI, 2009. "Are Temporary Workers Discriminated Against? Evidence from Europe," CHILD Working Papers wp17_09, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
    13. Perugini, Cristiano & Pompei, Fabrizio, 2016. "Employment protection and wage inequality within education groups in Europe," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 810-836.
    14. Garibaldi, Pietro & Violante, Giovanni, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
    15. 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.

    More about this item

    Keywords

    fixed-term contracts; permanent contracts; renewal rate; efficiency wage; unemployment;
    All these keywords.

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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