Motivated with the rise of flex-hour labour contracts in advanced economies, we develop a DSGE model and study the macroeconomic welfare effects of flex-hour contracts for a small open economy in a currency union. The framework exhibits two sectors: a fixed (rigid) sector and a flex sector. The fixed sector offers rigid contracts in terms of hours and wages while the flex sector offers flex contracts in both dimensions. We find that the flex sector has a welfare-enhancing role in accommodating short-term shocks in the economy if the fixed sector’s hour adjustment exhibits a high degree of rigidity. We also show that the wage flexibility in the fixed sector has a general equilibrium interaction with hours-work in the flex sector, inducing wage flexibility in the fixed sector to be relatively more desirable compared to an economy without a flex sector. Our results thus have important policy implications for a wide range of countries in European-Monetary-Union - characterized by large flex sectors.
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- wage flexibility
- labor market frictions
- flexible-hour labor contracts