Dual labor markets and the equilibrium distribution of firms

Josep Pijoan-Mas and Pau Roldan-Blanco

No 2442, Working Papers from Banco de España

Abstract: We study the effects of dual labor markets (i.e. 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. In particular, 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 use a directed search model of multi-worker firms, with ex-ante firm heterogeneity in technology types, and ex-post firm heterogeneity in transitory productivity, the composition of employment by contract type (fixed-term 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 an improved selection of firms, which more than offsets an increased misallocation of workers across firms.

Keywords: dual labor markets; temporary contracts; firm dynamics; unemployment (search for similar items in EconPapers)
JEL-codes: D83 E24 J41 L11 (search for similar items in EconPapers)
Pages: 76 pages
Date: 2024-10
New Economics Papers: this item is included in nep-bec, nep-dge, nep-iue and nep-lma
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Related works:
Working Paper: Dual Labor Markets and the Equilibrium Distribution of Firms (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2442

DOI: 10.53479/37913

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