Wage Incentive Profiles in Dual Labor Markets

28 Pages Posted: 13 Mar 2014

See all articles by Marco Di Cintio

Marco Di Cintio

University of Salento - Department of Economics and Mathematics and Statistics

Emanuele Grassi

University of Salento - Dipartimento di Scienze dell'Economia

Date Written: March 12, 2014

Abstract

This paper formalizes the use of flexible labor contracts in an efficiency wage framework and derives market dualism as an endogenous outcome. By allowing temporary contracts to be either renewed or converted into permanent contracts, new theoretical insights emerge both on the equilibrium wage structure and the incentive problem faced by workers and firms. Since temporary workers weigh the outside option of entering the labor market through permanent positions, the rate at which fixed-term contracts are converted into open-ended contracts is itself an incentive device which acts as a substitute for the wage. It follows that, even if temporary workers face a higher job loss risk, firms pay a wage differential in favor of permanent workers. The model also predicts that in equilibrium firms hire exclusively under flexible contracts, then half of them is converted into stable contracts while the remaining contracts are left to expire. Thus, in steady state, firms let permanent positions to survive in order to sustain the wage incentive structure.

Keywords: Dual Labor Market, Efficiency Wages, Wage Differentials, Flexible Contracts

JEL Classification: J31, J41, J63

Suggested Citation

Di Cintio, Marco and Grassi, Emanuele, Wage Incentive Profiles in Dual Labor Markets (March 12, 2014). FEEM Working Paper No. 22.2014, Available at SSRN: https://ssrn.com/abstract=2407888 or http://dx.doi.org/10.2139/ssrn.2407888

Marco Di Cintio

University of Salento - Department of Economics and Mathematics and Statistics ( email )

Piazza Tancredi, n7
Lecce, 73100
Italy

Emanuele Grassi (Contact Author)

University of Salento - Dipartimento di Scienze dell'Economia ( email )

via per Monteroni
Lecce, 73100
Italy

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