General Equilibrium Evaluation of Temporary Employment

Abstract

This paper studies the response of firms in an environment with heightened idiosyncratic risk and dual labor markets, a regular market with firing rigidity and a frictionless temporary labor market. I find that firing rigidity induces firms to switch from regular employment to temporary employment, and heightened risks amplify such behavior. Efficiency and welfare loss from friction and risk, though alleviated by a small extent, cannot be fully compensated by having temporary employment. This study also first extends the literature of temporary employment by examining its impact in the U.S. labor market