general equilibrium


Job security provisions are commonly invoked to explain the high and persistent European
unemployment rates. This belief has led several countries to reform their labor markets and
liberalize the use of fixed-term contracts. Despite how common such contracts have become
after deregulation, there is a lack of quantitative analysis of their impact on the economy. To
fill this gap, we build a general equilibrium model with heterogeneous agents and firing costs
in the tradition of Hopenhayn and Rogerson (1993). We calibrate our model to Spanish data,
choosing in part parameters estimated with firm-level longitudinal data. Spain is particularly
interesting, since its labor regulations are among the most protective in the OECD, and both
its unemployment and its share of fixed-term employment are the highest. We find that fixedterm
contracts increase unemployment, reduce output, and raise productivity. The welfare
effects are ambiguous.

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Alonso-Borrego, C. ., Fernandez-Villaverde, J. ., & Galdon-Sanchez, J. . (2004). Evaluating Labor Market Reforms: A General Equilibrium Approach. Retrieved from (Original work published May 2004)
Working Papers