Dual labor markets and labor protection in an estimated search and matching model

Abstract

This paper estimates a search and matching model with labor protection and dual labor markets in which the relative availability of temporary versus permanent contracts in the market is endogenous. Chilean data is used to evaluate the role of labor protection legislation and the use of temporary contracts in unemployment, welfare, and inequality. Results show that the share of temporary contracts in the labor market becomes more important as firing costs increase. Simultaneously, temporary contracts negatively affect the frequency with which regular jobs arrive and offset any positive effect of firing costs on unemployment. Finally, temporary contracts increase flexibility and generate increasing welfare gains as labor protection becomes more stringent.