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Fixed-Term and Permanent Employment Contracts: Theory and Evidence

Author

Listed:
  • Pedro Silos

    (Federal Reserve Bank of Atlanta)

  • Enchuan Shao

    (Bank of Canada)

  • Shutao Cao

    (Bank of Canada)

Abstract

This paper constructs a theory of the coexistence of fixed-term and permanent employment contracts in an environment with ex-ante identical workers and employers. Workers under fixed-term contracts can be dismissed at no cost while permanent employees enjoy labor protection. In a labor market characterized by search and matching frictions, firms find it optimal to discriminate by offering some workers a fixed-term contract while offering other workers a permanent contract. Match-specific quality between a worker and a firm determines the type of contract offered. We analytically characterize the firmâs hiring and firing rules. Using matched employer-employee data from Canada, we estimate the modelâs parameters. The effects of firing costs on wage inequality vary dramatically depending on whether search externalities are taken or not into account.

Suggested Citation

  • Pedro Silos & Enchuan Shao & Shutao Cao, 2011. "Fixed-Term and Permanent Employment Contracts: Theory and Evidence," 2011 Meeting Papers 872, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:872
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    References listed on IDEAS

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    Cited by:

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    2. Paqueo, Vicente B. & Orbeta, Aniceto Jr. C., 2016. "Beware of the "End Contractualization!" Battle Cry," Discussion Papers DP 2015-55, Philippine Institute for Development Studies.
    3. Elsayyad, May & Konrad, Kai A., 2012. "Fighting multiple tax havens," Journal of International Economics, Elsevier, vol. 86(2), pages 295-305.
    4. David Amirault & Paul Fenton & Thérèse Laflèche, 2013. "Asking About Wages: Results from the Bank of Canada’s Wage Setting Survey of Canadian Companies," Discussion Papers 13-1, Bank of Canada.
    5. Bentolila, Samuel & Dolado, Juan J. & Jimeno, Juan F., 2019. "Dual Labour Markets Revisited," IZA Discussion Papers 12126, Institute of Labor Economics (IZA).
    6. Rachel Scarfe, 2019. "Flexibility or certainty? The aggregate effects of casual jobs on labour markets," Edinburgh School of Economics Discussion Paper Series 294, Edinburgh School of Economics, University of Edinburgh.
    7. Olivier Charlot & Idriss Fontaine & Thepthida Sopraseuth, 2019. "Employment Fluctuations, Job Polarization and Non-Standard Work: Evidence from France and the US," THEMA Working Papers 2019-14, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    8. Charlot, Olivier & Malherbet, Franck, 2013. "Education and employment protection," Labour Economics, Elsevier, vol. 20(C), pages 3-23.
    9. Pierre Cahuc & Olivier Charlot & Franck Malherbet, 2016. "Explaining The Spread Of Temporary Jobs And Its Impact On Labor Turnover," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 533-572, May.
    10. Tejada, Mauricio M., 2017. "Dual labor markets and labor protection in an estimated search and matching model," Labour Economics, Elsevier, vol. 46(C), pages 26-46.
    11. Normann Rion, 2020. "Fluctuations in a Dual Labor Market," Working Papers halshs-02570540, HAL.
    12. Renato Faccini, 2014. "Reassessing Labour Market Reforms: Temporary Contracts as a Screening Device," Economic Journal, Royal Economic Society, vol. 124(575), pages 167-200, March.
    13. Etienne Wasmer & Nicolas Lepage-Saucier & Juliette Schleich, 2013. "Moving towards a single labour contract: pros, cons and mixed feelings," Sciences Po publications info:hdl:2441/772g8m5php8, Sciences Po.
    14. Normann Rion, 2021. "Job creation in a dual labor market: a constructivist approach," Working Papers hal-03125344, HAL.
    15. Paqueo, Vicente B. & Orbeta, Aniceto Jr. C., 2016. "Beware of the "End Contractualization!" Battle Cry," Discussion Papers DP 2016-55, Philippine Institute for Development Studies.
    16. Makoto Masui, 2020. "The determinants of employers’ use of temporary contracts in the frictional labor market," Metroeconomica, Wiley Blackwell, vol. 71(4), pages 803-834, November.
    17. Tealdi, Cristina, 2011. "How do employment contract reforms affect welfare? Theory and evidence," MPRA Paper 33573, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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