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Fixed Term Employment Contracts in an Equilibrium Search Model

81 Pages Posted: 13 Dec 2005  

Fernando Alvarez

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Marcelo Veracierto

Federal Reserve Bank of Chicago - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: November 2005

Abstract

Fixed term employment contracts have been introduced in a 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: fixed term contracts, temporary contracts, severance payments

JEL Classification: E24, J64, J65

Suggested Citation

Alvarez, Fernando and Veracierto, Marcelo, Fixed Term Employment Contracts in an Equilibrium Search Model (November 2005). Federal Reserve Bank of Chicago Working Paper No. 2005-14. Available at SSRN: https://ssrn.com/abstract=869437 or http://dx.doi.org/10.2139/ssrn.869437

Fernando Alvarez

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Social Science Building, Room 442
Chicago, IL 60637
United States
773-702-4412 (Phone)
773-702-8490 (Fax)

Marcelo Veracierto (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States
(312) 322-6595 (Phone)

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