Flexible Jobs in Macroeconomic Stabilization

Can flexible jobs stabilize aggregate demand? Using euro area data, I document that a larger flexible employment sector is associated with significantly lower consumption and inflation volatility. I explain this finding in a heterogeneous agent New Keynesian model with a dual labor market. After adverse shocks, firms substitute toward flexible vacancies because they are cheaper to create and their wages adjust faster. This shortens unemployment spells and weakens precautionary saving. A larger flexible sector reduces consumption and inflation volatility but increases employment volatility and reduces welfare. For a 5 percentage point increase in the flexible employment share, the welfare loss is approximately 0.8% of consumption. Thus, flexible jobs stabilize aggregate demand by concentrating employment risk on the workers least able to self-insure.