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Fixed-term and permanent employment contracts: theory and evidence

Author

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  • Shutao Cao
  • Enchuan Shao
  • Pedro Silos

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 firms' hiring and firing rules. Using matched employer-employee data from Canada, we estimate the wage equations from the model. The effects of firing costs on wage inequality vary dramatically depending on whether search externalities are taken into account.

Suggested Citation

  • Shutao Cao & Enchuan Shao & Pedro Silos, 2010. "Fixed-term and permanent employment contracts: theory and evidence," FRB Atlanta Working Paper 2010-13, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2010-13
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    1. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute of Labor Economics (IZA).
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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. Jonathan Créchet, 2023. "Risk Sharing in a Dual Labor Market," Working Papers 2307E, University of Ottawa, Department of Economics.
    6. Bentolila, Samuel & Dolado, Juan J. & Jimeno, Juan F., 2019. "Dual Labour Markets Revisited," IZA Discussion Papers 12126, Institute of Labor Economics (IZA).
    7. 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.
    8. Etienne Wasmer & Nicolas Lepage-Saucier & Juliette Schleich, 2013. "Moving towards a single labour contract: pros, cons and mixed feelings," Working Papers hal-03460980, HAL.
    9. 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.
    10. Charlot, Olivier & Malherbet, Franck, 2013. "Education and employment protection," Labour Economics, Elsevier, vol. 20(C), pages 3-23.
    11. 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(2), pages 533-572, May.
    12. 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.
    13. repec:hal:spmain:info:hdl:2441/772g8m5php8ui8eticr0ak867g is not listed on IDEAS
    14. Charlot, Olivier & Fontaine, Idriss & Sopraseuth, Thepthida, 2024. "Job polarization and non-standard work: Evidence from France," Labour Economics, Elsevier, vol. 88(C).
    15. Normann Rion, 2020. "Fluctuations in a Dual Labor Market," Working Papers halshs-02570540, HAL.
    16. 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.
    17. Normann Rion, 2021. "Job creation in a dual labor market: a constructivist approach," Working Papers hal-03125344, HAL.
    18. Orbeta, Aniceto Jr. C. & Paqueo, Vicente B., 2016. "Beware of the "End Contractualization!" Battle Cry," Discussion Papers DP 2016-55, Philippine Institute for Development Studies.
    19. 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.
    20. Alessia Matano, 2022. "Spatial externalities in big cities and duality of the labour market," Journal of Regional Science, Wiley Blackwell, vol. 62(2), pages 471-498, March.
    21. Tealdi, Cristina, 2011. "How do employment contract reforms affect welfare? Theory and evidence," MPRA Paper 33573, University Library of Munich, Germany.
    22. repec:spo:wpmain:info:hdl:2441/772g8m5php8ui8eticr0ak867g is not listed on IDEAS

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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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