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

Fluctuations in employment are one of the central issues in the labor market literature and have been investigated in a number of empirical and theoretical studies. This study presents a dynamic labor demand framework in which long-term and short-term contracts coexist, and analyzes the employment fluctuations to a temporary productivity shock. The differences between long-term and short-term contracts are stickiness of employment adjustments and explicit employment duration. This study shows that the fluctuations in short-term employment are more volatile than that of long-term employment. Moreover, it indicates that the large adjustment cost brings about the decreasing in employment fluctuations. The adjustment cost plays a role in smoothing the employment fluctuations, which is consistent with the result in a standard dynamic labor demand model. In addition, this study shows that the high quit rate leads to the high variations in long-term and short-term employment to the shock, and results in large employment fluctuations.