Flexible Contracts as Business Cycle Stabilizers

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages45
Volume2023-007
Publication statusPublished - 28 Mar 2023

Publication series

NameCentER Discussion Paper
Volume2023-007

Keywords

  • flexible contracts
  • unemployment risk
  • business cycle
  • welfare analysis
  • macroeconomic stabilizers

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