Temporary contracts, employment protection and skill: A simple model Elena Casquel a,1 , Antoni Cunyat b, ⁎ a Departamento de Estudios Económicos y Financieros, Universidad Miguel Hernández de Elche, Spain b Departament d'Anàlisi Econòmica, Universitat de València, Spain Received 22 March 2007; received in revised form 25 January 2008; accepted 13 February 2008 Available online 19 February 2008 Abstract We construct a theoretical labor market that incorporates skill differences across workers to identify under which conditions temporary contracts are a way to access to permanency. Firing costs and unemployment benefits increase the threshold productivity above which workers access to permanency. © 2008 Elsevier B.V. All rights reserved. Keywords: Temporary contracts; Skill; Firing costs JEL classification: J63; J64 1. Introduction In the literature that analyzes the dynamics of temporary contracts two contradictory hypotheses coexist (see Booth et al., 2002). One view considers the bridging function of temporary contracts, suggesting that they can serve as an entry route to permanency, while the other suggests that temporary contracts can become dead-end jobs. The aim of this note is to construct a theoretical labor market that incorporates skill differences across workers in order to identify under which conditions temporary contracts are a way for workers to access to permanent contracts (stepping stone effect) or they are dead-end jobs without any good prospect (trap effect). We obtain that what determines whether the stepping stone effect or the trap effect dominates for skilled and unskilled workers is whether or not the value of productivity exceeds a threshold productivity value, which depends crucially on the institutional labor market framework of the economy under study. More specifically, higher firing costs or unemployment benefits make it more difficult for workers to gain access to permanent jobs. Our model could be viewed as closer to Wasmer (1999) and Blanchard and Landier (2002) in the sense that they also analyze the coexistence of temporary and permanent contracts. The former has an endogenous coexistence of both types of contracts but no transition between contracts, while the latter assumes the exogenous coexistence of both types of contracts but has an endogenous transition into permanent contracts. However, the present model can generate a full range of con- version rates into permanent contracts (0, 1 or in between), given the skill heterogeneity of workers. This is an improve- ment on Blanchard and Landier (2002) and the fact that the conversion rate is endogenous is also an improvement over Wasmer (1999). More importantly, to the best of our knowledge there is no work available which can make accurate predictions on whether the stepping stone or trap effect dominates. 2. The model Assume an economy has a continuum of workers of size one. There are two types of workers: high-skilled and low-skilled Available online at www.sciencedirect.com Economics Letters 100 (2008) 333 – 336 www.elsevier.com/locate/econbase ⁎ Corresponding author. Av/dels Tarongers s/n, Campus dels Tarongers, Edifici Departamental Oriental, 46022 Valencia, Spain. Tel.: +34 96 3828246; fax: +34 963828249. E-mail addresses: Casquel@umh.es (E. Casquel), Antonio.Cunat@uv.es (A. Cunyat). 1 Av/ de la Universidad. 03202 Elche (Spain). 0165-1765/$ - see front matter © 2008 Elsevier B.V. All rights reserved. doi:10.1016/j.econlet.2008.02.023