1 Dual Labour Markets and Matching Frictions

This paper focuses on friction problems in the matching process arising in a dual labour market where good and bad jobs coexist. Specifically, we investigate the role of strong preferences for permanent contracts, in a labour market where also temporary contracts are offered, in increasing frictional unemployment. We use microdata from Portuguese job centres to estimate a reduced form equation of a matching function applying a competing risks discrete time hazard model that allows for stock-flow matching mechanism. Overall we find that, among unemployed flowing into temporary job, those looking for permanent contracts experience lower hazard rate, i.e. longer unemployment duration due to frictions deriving from contract mismatch. However, the effect tends to disappear controlling for a demand-side variable. Positive effects come from training activities are found, while job centres appear inadequate to favour the match for skilled workers. Policies aimed to reduce matching frictions and to improve labour market effectiveness should take care of that evidence and to increase the desirability of temporary contracts