Flexible Contracts, Macroeconomic Stabilization, and Welfare

Abstract

In this paper, I provide a novel insight for understanding the role of flexible contracts in the economy. I draw upon Dutch data to show that the availability of flexible jobs over the business cycle largely influences the unemployment risk of permanent workers. Motivated by the empirical evidence, I build a New Keynesian model in which permanent and flexible jobs coexist. I argue that the interaction between incomplete markets and the endogeneity of labor market transitions generates an important macroeconomic-stabilization hedging role for flexible contracts. However, this comes at a cost to flexible workers in terms of employment fluctuations, resulting in a non-monotonic relationship between welfare and the share of flexible contracts in the economy. My results have important policy implications for a wide range of developed countries that pursue flexicurity through dual labor markets.

Publication
José Gabriel Carreño
José Gabriel Carreño
PhD Candidate in Economics

I am a Ph.D. student at Tilburg University. Prior to my enrollment as a Ph.D. student, I worked as a research assistant in the Financial Research Unit of the Central Bank of Chile. At the Central Bank, I did research related to financial networks and systemic risk of financial institutions. My current research lies in the intersection between Macroeconomics, Finance, and Labor Economics. I am particularly interested in understanding the macroeconomic implications of different contractual arrangements on the business cycle.