Fixed-Term and Permanent Employment Contracts: Theory and Evidence

Shutao Cao, Enchuan Shao and Pedro Silos

Staff Working Papers from Bank of Canada

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 fixedterm 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 firm’s hiring and firing rules. Using matched employer-employee data from Canada, we estimate the model’s parameters. Increasing the level of firing costs increases wage inequality and decreases the unemployment rate. The increase in inequality results from a larger fraction of temporary workers and not from an increase in the wage premium earned by permanent workers.

Keywords: Labour markets; Potential output; Productivity (search for similar items in EconPapers)
JEL-codes: H29 J23 J38 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011
New Economics Papers: this item is included in nep-bec, nep-dge, nep-lab and nep-lma
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Citations: View citations in EconPapers (7)

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https://www.bankofcanada.ca/wp-content/uploads/2011/10/wp2011-21.pdf

Related works:
Working Paper: Fixed-Term and Permanent Employment Contracts: Theory and Evidence (2011)
Working Paper: Fixed-Term and Permanent Employment Contracts: Theory and Evidence (2010)
Working Paper: Fixed-term and permanent employment contracts: theory and evidence (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:11-21

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