Working Paper: NBER ID: w12791
Authors: Fernando Alvarez; Marcelo Veracierto
Abstract: This paper analyzes the effects of fixed-term contracts using a version of the Lucas and Prescott island model with undirected search. A fixed-term contract of length J is modeled as a tax on separations of workers with tenure higher than J . While in principle these policies require a very large state space to analyze the firms and households' problems, we show that equilibrium allocations solve a simple dynamic programming problem. Analyzing this problem we show that equilibrium employment dynamics are characterized by two dimensional inaction sets. Finally, to understand the effect of these contracts, we compare them with two extreme cases: for J = 1 the fixed-term 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 find that temporary contracts with J equivalent to three years length close about half of the gap between those two extremes.
Keywords: No keywords provided
JEL Codes: E24; J08; J31; J63; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed-term contracts of length j (C41) | employment of permanent workers (J63) |
| fixed-term contracts (J41) | flows from unemployment to employment (J68) |
| fixed-term contracts (J41) | average duration of unemployment (J64) |
| fixed-term contracts (J41) | firing rates (J63) |
| firing rates (J63) | unemployment rate (J64) |
| fixed-term contracts (J41) | gap between firing tax regime and laissez-faire conditions (H29) |