Pedro Portugal (Banco de Portugal and Universidade NOVA de Lisboa), Jose Varejao

Why Do Firms Use Fixed-Term Contracts?

This paper investigates the reasons why firms use fixed-term contracts. Two distinctive features of these contracts - reduced firing costs and the prohibition of contract rollover - are highlighted. Firms' decisions related to temporary contracts - the choice of the contract on offer and contract conversion - are modeled within standard adjustment costs and matching settings. The predictions of both models are tested by means of regression analysis performed on the stock of fixed-term contracts and the flows of temporary workers to permanent positions. Results from a beta-binomial regression model indicate that screening workers for permanent positions is the single most important reason why firms use this type of contract.

Keywords: Fixed-Term Contracts, Adjustment Costs, Temporary Employment

JEL Codes: J23, J41.

Session: 5d   Room 2003   Category: Labour market dynamics 2

Paper