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Dual Labor Markets and the Equilibrium Distribution of Firms

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  • Pijoan-Mas, Josep
  • Roldan-Blanco, Pau

Abstract

We study the effects of dual labor markets —namely, the co-existence of fixed-term and open-ended contracts— on the allocation of workers within and across firms, the equilibrium distribution of firms, aggregate productivity, and welfare. Using rich Spanish administrative data, we document that the use of fixed-term contracts is very heterogeneous across firms within narrowly defined sectors. Particularly, there is a strong relationship between the share of temporary workers and firm size, which is positive when looking at within-firm variation but negative when looking at the variation between firms. To explain these facts, we write a directed search model of multi-worker firms, with ex-ante firm heterogeneity in technology types, and ex-post firm heterogeneity in transitory productivity and in the composition of employment by contract type (fixed-terms or open-ended) and human capital accumulated on the job. In counterfactual exercises, we find that limiting the use of fixed-term contracts decreases the share of temporary employment and increases aggregate productivity, but it also reduces total employment and leads to an overall decline in total output and welfare. The increase in productivity comes from a better selection of firms, which more than offsets an increased misallocation of workers across firms.

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  • Pijoan-Mas, Josep & Roldan-Blanco, Pau, 2022. "Dual Labor Markets and the Equilibrium Distribution of Firms," CEPR Discussion Papers 17762, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:17762
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    References listed on IDEAS

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    1. Dolado, Juan J. & Felgueroso, Florentino & Jimeno, Juan F., 2000. "Youth labour markets in Spain: Education, training, and crowding-out," European Economic Review, Elsevier, vol. 44(4-6), pages 943-956, May.
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    More about this item

    Keywords

    Dual Labor Markets; Unemployment;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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