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Optimal Coexistence of Long-term and Short-term contracts in Labor Markets

Ines Macho-Stadler (), David Perez-Castrillo () and Nicolás Porteiro

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: We consider a market where firms hire workers to run their projects and such projects differ in profitability. At any period, each firm needs two workers to suc- cessfully run its project: a junior agent, with no specific skills, and a senior worker, whose effort is not verifiable. Senior workers differ in ability and their competence is revealed after they have worked as juniors in the market. We study the length of the contractual relationships between firms and workers in an environment where the matching between firms and workers is the result of market interaction. We show that, despite in a one-firm-one-worker set-up long-term contracts are the op- timal choice for firms, market forces often induce firms to use short-term contracts. Unless the market only consists of firms with very profitable projects, firms oper- ating highly profitable projects offer short-term contracts to ensure the service of high-ability workers and those with less lucrative projects also use short-term contracts to save on the junior workers' wage. Intermediate firms may (or may not) hire workers through long-term contracts.

JEL-codes: D86 C78 (search for similar items in EconPapers)
Pages: 41
Date: 2011-05-05
New Economics Papers: this item is included in nep-cta, nep-lab and nep-ppm
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

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Related works:
Working Paper: Optimal Coexistence of Long-Term and Short-Term Contracts in Labor Markets (2011) Downloads
Working Paper: Optimal Coexistence of Long-term and Short-term contracts in Labor Markets (2011) Downloads
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