Astrid Ruland, European University Institute (Job Market Seminar)

"Job Security over the Business Cycle"

Abstract

Dual labour markets, characterised by the coexistence of fixed-term and open-ended contracts, are a distinctive feature of many European economies. This paper develops a directed search model with aggregate uncertainty and risk-averse workers, wherein firms compete for workers through both the wage and the job security they offer. Firms offering open-ended contracts can pay lower wages (all else equal) but sacrifice firing flexibility during downturns. During expansions, the wage-saving effect dominates the flexibility cost, leading firms to favour open-ended contracts; this twists the pool of active contracts towards open-ended ones (and vice versa during recessions) and inten- sifies overall job creation. Furthermore, when accounting for firm heterogeneity, the model shows that some firms strategically offer open-ended contracts to attract work- ers, even when the corresponding match values are lower. This creates a composition effect whereby workers self-select into more secure positions at high-productivity firms. I provide direct evidence of this form of labour-market competition between firms using Labour Force Survey data from four major European economies.

Contact person: Morten Graugaard Olsen