Fixed-Term and Permanent Employment Contracts: Theory and Evidence

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 fixedterm 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 firm's hiring and firing rules. Using matched employer-employee data from Canada, we estimate the model's parameters. Increasing the level of firing costs increases wage inequality and decreases the unemployment rate. The increase in inequality results from a larger fraction of temporary workers and not from an increase in the wage premium earned by permanent workers.

Reassessing Labour Market Reforms: Temporary Contracts as a Screening Device

“… Recent work by Cao et al . () as well as Cahuc et al . () endogenises the decision to offer temporary versus permanent contracts. …”

“…A share of new hires under temporary contracts above 90% is consistent with a share of employment under temporary contracts around 30% as in Spain, if the duration of temporary jobs is sufficiently low. 9 Recent work byCao et al (2011) as well asCahuc et al (2012) endogenises the decision to offer temporary versus permanent contracts.© 2013 Royal Economic Society.…”

Explaining the Spread of Temporary Jobs and Its Impact on Labor Turnover

“…Cao et al. () provide a matching model where firms find it optimal to offer high‐quality matches a permanent contract because temporary workers continue to search on the job whereas permanent workers do not. Finally, Alonso‐Borrego et al.…”

“…This implies that a firm without financing constraints would hire permanent workers up to the point where expected firing costs are equal to the productivity gain with respect to temporary workers. Cao et al (2010) provide a matching model where firms find it optimal to offer high-quality matches a permanent contract because temporary workers continue to search on the job whereas permanent workers do not. Finally, Alonso-Borrego et al…”

Dual labor markets and labor protection in an estimated search and matching model

“…Hence, the following question arises: Once the government authorizes the use of temporary contracts, are these contracts an equilibrium response of firms to introduce flexibility when firing costs are high? An interest in this endogenous relation has emerged only recently, and the related literature is still scarce (see Cao et al, 2011;Alvarez and Veracierto, 2012;Macho-Stadler et al, 2011;Paolini and de Tena, 2012).…”