Macro Welfare Effects of Flexible Labor Contracts

Research output: Working paperDiscussion paperOther research output

135 Downloads (Pure)


We develop a small open economy DSGE model to study the macro welfare effects of flexible labor contracts for an economy in a currency union. The framework exhibits two sectors: a fixed sector and a flex sector. The fixed sector offers contracts that exhibit rigidities in working-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 shocks, if the fixed sector’s hour adjustment exhibits a high degree of rigidity; and moreover, the presence of the flex sector reduces the desirability of rigid wages in the fixed sector. The welfare analysis also reveals an optimal flex sector size. With the baseline parameterization, a flex sector of 20% of the overall employment maximizes the macro welfare. Our results have important policy implications for a wide range of countries in European-Monetary-Union -characterized by growing and large flex sectors.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages46
Publication statusPublished - 2 Nov 2021

Publication series

NameCentER Discussion Paper


  • two-sector DSGE model
  • wage flexibility
  • currency union
  • loss function
  • labor market frictions
  • flexible-hour labor contracts


Dive into the research topics of 'Macro Welfare Effects of Flexible Labor Contracts'. Together they form a unique fingerprint.

Cite this