81 Pages Posted: 13 Dec 2005
Date Written: November 2005
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: 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