Abstract:
This paper introduces a search-and-matching model of a dual labor market—divided between permanent and temporary jobs—with risk aversion and long-term, history-contingent employment contracts. Under limited commitment and in the presence of firing costs, optimal contracts entail a trade-off between insurance and the flexibility of employment separation. This trade-off is a novel rationale for the coexistence of permanent and temporary jobs, a pervasive feature of labor markets in high-income countries. In equilibrium, efficient risk sharing between workers and firms combined with heterogeneous match quality leads to a coexistence of contracts with different degrees of flexibility. A quantitative analysis of the model captures key differences in aggregate outcomes between the U.S., taken as a benchmark, and France and Spain, two epitomes of labor markets with a strong divide between permanent and temporary jobs. Lowering restrictions on temporary contracts reduces the employment share of permanent jobs and increases the unemployment rate, in line with recent evidence based on administrative data.
Presenter: Jonathan Créchet (University of Ottawa)
Title: “Risk Sharing in a Dual Labor Market”