Fixed-term contracts as a source of labour demand fluctuations

Employment fluctuations are one of the central issues in the business cycle literature. The fluctuations depend crucially not only on the economic conditions but also on the labour market institutions. Since most previous studies have assumed indefinite-term contracts (ITC) implicitly, the implications of fixed-term contracts (FTC) on dynamic labour demand have been rather overlooked. This article investigates dynamic labour demand of a firm with FTC to show that the employment fluctuations under FTC can be totally different from those under ITC. In particular, a productivity shock that takes place at a future date generates the current fluctuations in employment under FTC, while it does not under ITC.