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Why do Firms Use Fixed-Term Contracts?

  • José Varejão
  • Pedro Portugal

This paper investigates the reasons why firms use fixed-term contracts. Two distinctive features of these contracts - reduced firing costs and the prohibition of contract rollover - are highlighted. Firms' decisions related to temporary contracts - the choice of the contract on offer and contract conversion - are modeled within standard adjustment costs and matching settings. Regression analysis is performed on the stock of fixed-term contracts and the flows of temporary workers to permanent positions. Results from a beta-binomial regression model indicate that screening workers for permanent positions is the single most important reason why firms use this type of contract.

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File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/WP200308.pdf
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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200308.

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Date of creation: 2003
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Handle: RePEc:ptu:wpaper:w200308
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  1. José Varejão & Pedro Portugal, 2007. "Employment Dynamics and the Structure of Labor Adjustment Costs," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 137-165.
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  4. Renato Faccini, 2008. "Reassessing Labor Market Reforms: Temporary Contracts as a Screening Device," Economics Working Papers ECO2008/27, European University Institute.
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  8. James J. Heckman & Robert J. Willis, 1975. "A Beta-Logistic Model for the Analysis of Sequential Labor Force Participation by Married Women," NBER Working Papers 0112, National Bureau of Economic Research, Inc.
  9. Catalina Amuedo-Dorantes, 2000. "Work Transitions into and Out of Involuntary Temporary Employment in a Segmented Market: Evidence from Spain," ILR Review, Cornell University, ILR School, vol. 53(2), pages 309-325, January.
  10. Güell, Maia & Petrongolo, Barbara, 2003. "How Binding are Legal Limits? Transitions from Temporary to Permanent Work in Spain," CEPR Discussion Papers 3931, C.E.P.R. Discussion Papers.
  11. J. M. R. Murteira & Joao M. C. Santos Silva, 2000. "Estimation of Default Probabilities Using Incomplete Contracts Data," Econometric Society World Congress 2000 Contributed Papers 1121, Econometric Society.
  12. Garcia Serrano, Carlos, 1999. "Worker Turnover and Job Reallocation: The Role of Fixed-Term Contracts," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 237a, January.
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  14. Cynthia L. Gramm & John F. Schnell, 2001. "The Use of Flexible Staffing Arrangements in Core Production Jobs," ILR Review, Cornell University, ILR School, vol. 54(2), pages 245-258, January.
  15. Ana Rute Cardoso & Pedro Portugal, 2005. "Contractual Wages and the Wage Cushion under Different Bargaining Settings," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 875-902, October.
  16. Olivier Blanchard & Augustin Landier, 2001. "The Perverse Effects of Partial Labor Market Reform: Fixed Duration Contracts in France," NBER Working Papers 8219, National Bureau of Economic Research, Inc.
  17. David H. Autor, 2001. "Why Do Temporary Help Firms Provide Free General Skills Training?," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1409-1448.
  18. Abowd, John M & Corbel, Patrick & Kramarz, Francis, 1997. "The Entry and Exit of Workers and the Growth of Employment: An Analysis of French Establishments," CEPR Discussion Papers 1765, C.E.P.R. Discussion Papers.
  19. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc.
  20. Hamermesh, Daniel S & Wolfe, John R, 1990. "Compensating Wage Differentials and the Duration of Wage Loss," Journal of Labor Economics, University of Chicago Press, vol. 8(1), pages S175-97, January.
  21. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  22. 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 F214-F244, June.
  23. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  24. Eric Maurin, 2000. "The European Paradox : Do Flexible Contracts Create Rigid Labor Markets ?," Working Papers 2000-07, Centre de Recherche en Economie et Statistique.
  25. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, March.
  26. Lane, Julia & Stevens, David & Burgess, Simon, 1996. "Worker and job flows," Economics Letters, Elsevier, vol. 51(1), pages 109-113, April.
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