Working papers

« Waiting for the Prince Charming: Fixed-Term Contracts as Stopgaps »

See the paper and the code. A discussion about the paper is available on the NEP-DGE blog.

Abstract:
In this paper, I build a simple Mortensen-Pissarides model embedding a dual labor market. I derive conditions for the existence of an equilibrium with both protected open-ended contracts and exogenously short fixed-term contracts. I also study dynamics after a change in firing costs. Fixed-term contracts play the role of fillers while open-ended contracts are used to lock up most productive matches. High firing costs favor the emergence of a dual equilibrium and encourage the resort to fixed-term employment in job creation. This substitution scheme is intertwined with a general-equilibrium effect. Open-ended contracts represent the bulk of employed workers; higher firing costs reduces aggregate job destruction, which pushes down unemployment and in turn reduces job creation flows through fixed-term contracts. I calibrate the model on the French labor market. Policy experiments demonstrate that there is no joint gain in employment and social welfare through changes on firing costs around the baseline economy. Welfare improving policies consist in large cuts in firing costs, where fixed-term employment eventually disappears. Increases in firing costs within a dual labor market lead to a sluggish adjustment, while large cuts in firing costs lead to a quicker one. The adjustment time is highly non-monotonous between these two extremes. Uncertainty over firing costs significantly strengthens fixed-term employment on behalf of open-ended employment.

« Fluctuations in a Dual Labor Market »

See the paper and the code on GitHub.

Abstract:
I build a New-Keynesian dynamic stochastic general-equilibrium model with a dual labor market. Firms and workers meet through a matching technology à-la Diamond-Mortensen-Pissarides and face a trade-off between productivity and flexibility at the hiring stage. All else equal, open-ended contracts are more productive than fixed-term contracts, but they embed a firing cost. The share of fixed-term contracts in job creation fluctuates endogenously, which enables to assess the resort to temporary contracts along the cycle and its response to different shocks. I estimate the model using a first-order perturbation method and classic Bayesian procedures with macroeconomic data from the Euro area. I find that the share of fixed-term contracts in job creation is counter-cyclical. The agents react to shocks essentially through the job creation margin and the contractual composition of the hires. Moreover, a general-equilibrium effect arises; the substitution between fixed-term and open-ended contracts at the hiring stage influences the job seekers’ stock, which in turn impacts job creation. Using my previous estimates and solving the model with a third-order perturbation method, I find that fixed-term employment reacts to negative aggregate demand shocks and uncertainty shocks oppositely. This result suggests that fixed-term employment could be used to identify uncertainty shocks in future research. As for inflation, changes in firing costs do not alter its dynamics as long as open-ended and fixed-term matches do not differ much in productivity all else equal.

« Job Creation in a Dual Labor Market: a Constructivist Approach« 

See the paper.

Abstract:
In this paper, I review matching models of dual labor markets from a theoretical point of view and describe the consequences of the most common sets of assumptions on job creation. I assert that two poles arise in the literature depending on the modeling of fixed-term contracts. Some papers assume that fixed-term contracts are flexible in the sense that firm-worker matches may costlessly separate any time. Others assume that a fixed-term match is rigid and cannot split before reaching its stipulated termination date, regardless the undergone shocks. Modeling fixed-term contracts as utterly flexible tends to make fixed-term contracts the only vehicle of job creation, while open-ended contracts only appear as converted expiring fixed-term contracts. This counter-factual result encourages the use of \emph{ad hoc} hiring rules that ensure that job creation involves both contracts. On the contrary, modeling fixed-term contracts as rigid makes fixed-term contracts less attractive and leaves more room for job creation to involve open-ended contracts. Substitution effects between contracts can be considered in these frameworks. I build up a model with rigid fixed-term contracts and heterogeneous productivity of matches assumption by assumption and find major robustness issues. Introducing the convertibility of fixed-term contracts into open-ended ones flips over the ranking of contracts at the hiring stage with respect to productivity. Enabling matches to optimize the average duration of fixed-term contracts leads to highly counter-factual results: the shortest and the least productive fixed-term matches have the highest probabilities to be converted to open-ended contracts. The highlighted robustness issues and counter-factual predictions contaminate recent papers studying labor market dualism and heterogeneity in workload fluctuations.

Research in Progress

« Marital Sorting and Wealth », with Mehdi Bartal

Abstract:
Americans tend to marry their like, and this is more and more the case. Is marital sorting an important driver of wealth inequality in the US? To answer this question, we propose a life cycle model with discount factor heterogeneity, endogenous marriage and wealth accumulation under borrowing constraints. We solve the intra-household consumption-savings problem when spouses have heterogeneous preferences. We highlight that consumption gains from marriage are crucial to the analysis. We calibrate the model on US data and show that both participation in the marriage market and marital sorting along discount factors have non-negligible impacts on the aggregate level of wealth concentration. Our model predicts that marriage decline reduces inequality while rising marital sorting widens the wealth gap between Americans.

« The Capital and Labor Principle », with Marco Ranald

Ph.D. dissertation

« Dual Labor Markets and the Macro-Economy » »

See the dissertation.

Abstract:
Despite a strict law regarding the use of atypical contracts, fixed-term employment has been expanding in Western Europe over the last decades. My dissertation studies the macroeconomic implications of this expansion. Academics assert that high firing costs account for it. However, most papers consider steady-state responses of the labor market to changes in firing costs and overlook transitions.  In my first chapter, I bridge that gap and model a dual labor market as an extension of the classic Mortensen-Pissarides model. Firing costs protect open-ended contracts, whereas fixed-term contracts have a given average duration and costlessly end at expiry. New firm-worker pairs choose the contract that maximizes their joint surpluses. I calibrate the model on French data and find that transitions to a unique contract equilibrium with lower firing costs take a long time, reduce open-ended employment and increase non-employment. In my second chapter, I study fluctuations in a dual labor market with a quite similar model plugged in a typical New-Keynesian framework. As employment protection impacts the resort to fixed-term contracts, it impacts the way firms optimize their pricing decisions in response to shocks. I also look how changing firing costs alters inflation dynamics. I calibrate and estimate the model on Euro area quarterly time series data using a Sequential Monte Carlo method. The model replicates well labor market moments. I find that inflation volatility does not respond to changes in firing cost, whereas the dynamics of inflation components are deeply altered. Using a third-order perturbation method and introducing stochastic volatility, I find that fixed-term employment may enable to tell apart uncertainty and negative demand shocks. My third chapter focuses on the modeling of job creation in matching models. I review the literature and categorize papers regarding their modeling of fixed-term contracts. Fixed-term contracts may be considered as flexible – they may split anytime at zero cost – or rigid – they cannot split before their stipulated expiry date. A trade-off arises between robustness and being able to account for contractual substitution at the hiring stage. Job creation tends to occur through fixed-term contracts only, when they are flexible. Thus, many papers resort to ad hoc} hiring rules that direct a settled share of new matches towards open-ended contracts, which shut down contractual substitution effects in job creation. On the contrary, rigid fixed-term contracts lead to dual job creation, but the ranking of contracts in job creation lacks robustness.