Working Paper: CEPR ID: DP17762
Authors: Josep Pijoanmas; Pau Roldanblanco
Abstract: We study the effects of dual labor markets —namely, the co-existence of fixed-term and open-ended contracts— on the allocation of workers within and across firms, the equilibrium distribution of firms, aggregate productivity, and welfare. Using rich Spanish administrative data, we document that the use of fixed-term contracts is very heterogeneous across firms within narrowly defined sectors. Particularly, there is a strong relationship between the share of temporary workers and firm size, which is positive when looking at within-firm variation but negative when looking at the variation between firms. To explain these facts, we write a directed search model of multi-worker firms, with ex-ante firm heterogeneity in technology types, and ex-post firm heterogeneity in transitory productivity and in the composition of employment by contract type (fixed-terms or open-ended) and human capital accumulated on the job. In counterfactual exercises, we find that limiting the use of fixed-term contracts decreases the share of temporary employment and increases aggregate productivity, but it also reduces total employment and leads to an overall decline in total output and welfare. The increase in productivity comes from a better selection of firms, which more than offsets an increased misallocation of workers across firms.
Keywords: dual labor markets; unemployment
JEL Codes: D83; E24; J41; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dual labor market structure (J42) | heterogeneous distribution of temporary employment (J69) |
| firm size (L25) | share of temporary workers (J69) |
| limiting duration of ft contracts (G13) | decreases share of temporary employment (J63) |
| limiting duration of ft contracts (G13) | decreases unemployment rate (J68) |
| limiting duration of ft contracts (G13) | firm destruction (G33) |
| limiting duration of ft contracts (G13) | lower aggregate productivity (O49) |
| increasing duration of ft contracts (C41) | enhances aggregate productivity (O49) |
| increasing duration of ft contracts (C41) | reduces unemployment (J68) |
| calibrated model (C51) | reproduces empirical relationship between firm size and temporary share (L25) |