Fixed term employment contracts in an equilibrium search model

Fernando Alvarez and Marcelo Veracierto

No WP-05-14, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Fixed term employment contracts have been introduced in number of European countries as a way to provide flexibility to economies with high employment protection levels. We introduce these contracts into the equilibrium search model in Alvarez and Veracierto (1999), a version of the Lucas and Prescott island model, adapted to have undirected search and variable labor force participation. We model a contract of length J as a tax on separations of workers with tenure higher than J. We show a version of the welfare theorems, and characterize the efficient allocations. This requires solving a control problem, whose solution is characterized by two dimensional inaction sets. For J = 1 these contracts are equivalent to the case of firing taxes, and for large J they are equivalent to the laissez- faire case. In a calibrated version of the model, we evaluate to what extent contract lengths similar to those observed in Europe, close the gap between these two extremes.

Keywords: labor contracts; Employment (Economic theory) (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Fixed-term employment contracts in an equilibrium search model (2012)
Working Paper: Fixed-Term Employment Contracts in an Equilibrium Search Model (2006)
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