Temporary Contracts, Employment Protection, and Collective Bargaining

Abstract

This paper examines the effect of employment protection in a matching model with endogenous job destruction, collective bargaining, and two types of employment contracts. Using this framework, we show that (i) the impact on job creation and job destruction caused by reducing the firing costs associated with temporary jobs depends on the labour unions' bargaining strength and the gap in firing costs between contracts; (ii) reducing the firing costs associated with permanent jobs unambiguously decreases equilibrium unemployment if labour unions have strong bargaining power; and (iii) the impact caused by the firing costs differs between collective and individual bargaining.

Asymmetric Labor Market Reforms: Effects on Wage Growth and Conversion Probability of Fixed-Term Contracts

“…A fixed-term contract may continue until it reaches a certain maximum legal duration, at which point the contract is automatically converted to permanent if the match is continued. The conversion of the contract will take place if the benefits of a more stable employment relationship outweigh its costs, such as the higher labor turnover costs associated with permanent contracts (see, for example, Masui 2013).…”

“…The impact of the referred change in legislation is captured by δ . By extending the maximum legal duration of fixed-term contracts, the change in legislation might have decreased the cost of not converting the contract and increased the reservation productivity at which the contract is converted (Boeri 2011; Masui 2013). Therefore, we expect that the change in legislation had a negative impact on the probability of a fixed-term contract being converted into an open-ended contract.…”