Fixed-term contracts and unemployment: an efficiency wage analysis

Maia Güell ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: Unemployment; firing costs; two-tier system; permanent contracts; fixed-term contracts (search for similar items in EconPapers)
JEL-codes: J01 R14 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2000-07
References: Add references at CitEc
Citations: View citations in EconPapers (23)

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http://eprints.lse.ac.uk/20181/ Open access version. (application/pdf)

Related works:
Working Paper: Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis (2015)
Working Paper: Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:20181

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