Fixed-term contracts as a source of labour demand fluctuations

ABSTRACT

Employment fluctuations are one of the central issues in the business cycle literature. The fluctuations depend crucially not only on the economic conditions but also on the labour market institutions. Since most previous studies have assumed indefinite-term contracts (ITC) implicitly, the implications of fixed-term contracts (FTC) on dynamic labour demand have been rather overlooked. This article investigates dynamic labour demand of a firm with FTC to show that the employment fluctuations under FTC can be totally different from those under ITC. In particular, a productivity shock that takes place at a future date generates the current fluctuations in employment under FTC, while it does not under ITC.

KEYWORDS:

• Employment fluctuations
• dynamic labour demand
• fixed-term contracts
• indefinite-term contracts

JEL CLASSIFICATION:

• J30
• J63
• D92

Acknowledgement

The author wishes to thank Prof. Tamotsu Nakamura and participants at KMSG conference for their valuable comments.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ is the terminal condition on to the dynamic optimization problem. The initial condition must also be given.

² Although the proof of the proposition is lengthy and hence we omit it, it is nothing more than the application of comparative statics.