Business Cycle Fluctuations With the Division of Permanent and Temporary Employment

Abstract

In the mainstream real business cycle (RBC) model, labor can be viewed as temporary employment since the firm's demand for labor behaves directly in response to stochastic productivity shocks in each period. This paper provides a tractable way of analyzing fluctuations in permanent and temporary employment over the business cycle, as well as the underlying driving forces. This inclusion of heterogeneity helps reconcile the RBC model with the U.S. data given that temporary employees in general only account for a small proportion of total private‐sector employment (about 2%–3%). We draw an explicit division between permanent and temporary employment and resort to this separation to account for stylized facts that characterize a two‐tier labor market. In particular, with regard to the U.S. labor market, our benchmark model can well explain the motivating facts: (1) temporary employment is much more volatile than permanent employment, (2) the share of temporary employment (the ratio of temporary to aggregate employment) exhibits strong pro‐cyclicality, (3) permanent employment lags by two quarters on average, and (4) the correlation between temporary employment and output is stronger than that involving the permanent counterpart. The quantitative analysis suggests that our proposed channels explain the main facts well and the model further provides plausible reasoning for a firm's labor hoarding. (JEL E24, E32)

Labor Hoarding: An Old Phenomena in Modern Times? Case Study for Eu Countries

“…Employees with higher qualifications are more often retained in companies than unskilled workers with typical skills (Mangan, 1982;Pissarides, 1991). On the other hand, expenditure on recruitment and training costs incurred by enterprises employing fulltime employees is more likely to be returned (Bentolila et al, 2019;Chen et al, 2019). In the case of employees based on flexible employment forms, the costs of dismissals are lower (Booth & Wood, 2008).…”

“…Analyses at the company level focus on the methods of obtaining employees (Cassell et al, 2002;Day & Rodgers, 2015;Dawson et al, 2017), determining salary level (Card et al, 2016;Lopes de Melo, 2018), assessing the impact of technological progress on the structure of employment in companies (Arntz et al, 2016;Frey & Osborne, 2017;Olkiewicz, 2015). In macroeconomic terms, the most frequently discussed issues concern the flexibility of working time (Wilthagen & Tros, 2004;Chen et al, 2019), the minimum wage (Blanchard, 2004), labor market equilibrium (Blanchard & Landier, 2002;Gałecka-Burdziak, 2017) and work productivity (Boeri & Garibaldi, 2005a;Nitoi & Pochea, 2016;Stone, 1923;Quiggin, 2011;Klinger & Weber, 2019). The functioning of labor market, both in the micro-and macroeconomic context, depends on the solutions used in labor market institutions (Jiménez-Rodríguez & Russo, 2012;Boeri, 2011).…”