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Employment fluctuations in a dynamic model with long-term and short-term contracts

Matsue, Toyoki (2019): Employment fluctuations in a dynamic model with long-term and short-term contracts.

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Fluctuations in employment are a central issue in labour market literature, and they have been investigated in many empirical and theoretical studies. This study constructs a model with adjustment costs and explicit employment contract duration and analyses the employment fluctuations in a productivity shock. The long- and short-term contracts differ in the stickiness of employment adjustments and explicit employment duration. The model shows an oscillatory behaviour of employment in the shock, which is not observed in an adjustment cost model. Our study shows that a high adjustment cost leads to a high short-term employment ratio and a decrease in employment fluctuations. The adjustment cost helps to smooth employment fluctuations, which is consistent with the result in a standard dynamic labour demand model. In addition, this study shows that a high quit rate leads to high variations in long- and short-term employment due to shock and results in high employment fluctuations.

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