Employment uctuations in a dual labor market

The recent economic downturn has highlighted a remarkable heterogeneity in the response of unemployment across OECD countries. This paper analyzes the role of labor market duality meaning the coexistence of "temporary" contracts with low \u85ring costs and "permanent " contracts with high \u85ring costs in explaining employment and unemployment volatility. We address this question in a version of the Mortensen-Pissarides (1994) model of job creation and destruction. Calibrating the model to match Span-ish labor market ows implies a large amount of ine ¢ cient churning, with temporary jobs disappearing four times as fast as permanent jobs, and with productivity of the marginal temporary job destroyed due to contract expiry more than double that of the marginal permanent job destroyed. Recessions and booms have highly asymmetric e¤ects in this framework, because employment builds up gradually during booms, due to matching fric-tions, whereas the beginning of a recession causes a sudden burst of \u85ring o