Endogenous Dual Labor Markets

Pedro Silos and Enchuan Shao

No 1164, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper presents a tractable model to explain the coexistence of temporary and permanent employment contracts. In our environment, workers are ex-ante heterogeneous and self-select into markets characterized by different labor contracts offered by firms. As a result, segmented labor markets arise endogenously as firms use different contracts to target different types of workers. Temporary contracts allow firms to avoid firing costs and screen suitable workers for permanent positions to save search costs. Permanent contracts allows firms to improve match quality. The trade-off between the short-run flexibility and the long-run productivity gain accounts for the coexistence. The model is rich enough to study several important features regarding the cyclical behavior of temporary and permanent jobs. It allows us to analyze the decision on hiring, firing, promotion from the temporary job to the permanent job, and job-to-job transitions. All these features are important to understand the dual labor markets observed in many OECD countries.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1164

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