We study the business cycle behavior of segmented labor markets with flexibility at the margin (e.g., just affecting fixed-term contracts) and ask whether these types of labor markets can display similar cyclical volatility as fully deregulated ones. We present a matching model with temporary and permanent jobs where (i) there is a gap in the firing costs associated with these types of jobs, and (ii) there are restrictions in the creation and duration of fixed-term contracts. We show that the scenario of flexibility at the margin provides an intermediate situation, in terms of unemployment volatility, between fully regulated and fully deregulated labor markets. This analysis yields new insights into the interpretation of the recent volatility changes witnessed in the OECD area.
- Flexibility at the margin,
- Separation costs,
- Matching model
Available at: http://works.bepress.com/manueltoledo/5/