Why Do Firms Use Fixed-Term Contracts?

32 Pages Posted: 15 Oct 2009

See all articles by Pedro Portugal

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

José Varejão

Universidade do Porto - Faculdade de Economia (FEP)


Temporary forms of employment account for a variable but never trivial share of total employment in both the U.S. and in Europe. In this article we look at how one specific form of temporary employment − employment with fixed-term contracts − fits into employers' hiring policies. We find that human capital variables (schooling, skills and employer-provided training) as measured at the levels of the worker and the workplace are important determinants of the employers’ decisions to hire with fixed-term contracts and to promote temporary workers to permanent positions. Those employers that hire more with fixed-term contracts are also those that are more likely to offer a permanent position to their newly-hired temporary employees. Our results indicate that fixed-term contracts are used as mechanisms for screening workers for permanent positions.

Keywords: fixed-term contracts, adjustment costs, labor demand

JEL Classification: J23, J41

Suggested Citation

Portugal, Pedro and Varejão, José, Why Do Firms Use Fixed-Term Contracts?. IZA Discussion Paper No. 4380, Available at SSRN: https://ssrn.com/abstract=1489203

Pedro Portugal (Contact Author)

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

José Varejão

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Roberto Frias
Porto, 4200-464

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