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Fixed-term contracts and unemployment: an efficiency wage analysis

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  • Guell, Maia
Abstract
During the 1980s, many European countries introduced fixed-term contracts to fight high and persistent levels of unemployment. Although these contracts have been widely used, unemployment has remained about the same after fifteen years. This paper builds a theoretical model to reconcile these facts. We analyse the labour market effect of the introduction of fixed-term contracts and the firm''s choice of contracts are studied. Permanent contracts are the standard way to offer incentives, but fixed-term contracts are cheaper. This generates an externality, which can make employment higher in the system with only permanent contracts. As a consequence, from a social point of view, the share of fixed-term contracts is too large. Increases in the renewal rate of fixed-term contracts into permanent contracts lead to higher employment levels. Finally, the model highlights the interactions between different rigidities in the labour market. Aggregate employment and the share of temporary contracts are affected in the same way by the firing costs and the flexibility of wages.

Suggested Citation

  • Guell, Maia, 2000. "Fixed-term contracts and unemployment: an efficiency wage analysis," LSE Research Online Documents on Economics 20181, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:20181
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    File URL: http://eprints.lse.ac.uk/20181/
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    References listed on IDEAS

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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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    More about this item

    Keywords

    Unemployment; firing costs; two-tier system; permanent contracts; fixed-term contracts;
    All these keywords.

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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