Analysis Of Non-fixed Term Labor Contract System On The Labor Market

LAW ON EMPLOYMENT CONTRACTS came into effect on January 1,2008 after its adoption by the Session of the Standing Committee. However, even before its implementation, some new regulations on "open-ended employment contracts" had aroused heated debate among various circles of society.This article is to analyze what the implementation of open-ended employment contract system would bring to employers'employment decision, employees'human capital investment and the interaction between them, thus to demonstrate how the open-ended employment contract system would affect the operation of the labor market, and finally to evaluate the effect of the new system.Compared with related papers before, this article has three new contribution:Firstly, it mainly focuses on the increase of dismissal costs and discusses on the effect of open-ended employment on labor market by analyzing the employment decision by employers and the human capital investment decision by employees.Secondly, the idea of "real option" is used in the analysis of employers' employment decision. In this article, dismissal costs are considered as a friction in the labor market, which enables employers to get a real option by delaying their employment decisions. Therefore, employers get more conservative when making employment decisions.Finally, dismissal cost is added into the Kahn & Huberman(1988) model about up-or-out contracts. According to the analysis, dismissal cost may discourage employers to offer up-or-out contracts, and thus employees'motivation of human capital investment is restrained by the two-sided moral hazard.The opinion of this article is that although the effect of the open-ended employment contract system implemented now on the stability of labor market remains dubious, its effect on employees'human capital accumulation is negative and it does no good on employees'income as well. Besides, it also lowers the allocation efficiency of labor market.