Temporary Contracts, Incentives and Unemployment

Rodríguez Mora, José V and Güell, Maia
Authors registered in the RePEc Author Service: Maia Güell ()

No 8116, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Firing-cost-free temporary contracts were introduced in many European countries during the eigthies in order to fight high unemployment rates. Their rationale was to increase job creation in a context of high firing costs that were politically hard to decrease. Temporary contracts have become a prevalent labor market institution in many countries, and with hindsight it seems uncontroversial that they have failed at decreasing unemployment. Evidence indicates that temporary contracts not only increases unemployment fluctuations, but also unemployment levels. In this paper we argue that the rationale for the introduction of temporary contracts is flawed at its root. We provide a novel explanation of why temporary contracts can increase unemployment even in a context where a reduction of firing costs would actually reduce unemployment. We argue that, if minimum wages are kept at high levels, temporary contracts have an effect not unlike the increase of unemployment benefits. By increasing the flows in and out of unemployment into relatively highly paid temporary jobs (minimum wage), they increase the value of being unemployed. This has a negative effect on incentives, increases wages and reduces the willingness of firms to create employment. We present empirical evidence supportive of some of the implications of the model.

Keywords: Firing costs; Fixed-term and permanent contracts; Minimum wage; Renewal rate; Unemployment benefits (search for similar items in EconPapers)
JEL-codes: J41 J42 J63 (search for similar items in EconPapers)
Date: 2010-11
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP8116 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:8116

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8116

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().