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The Perverse Effects of Partial Labor Market Reform: Fixed Duration Contracts in France

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  • Olivier Blanchard
  • Augustin Landier

Abstract

Rather than decrease firing costs across the board, a number of European countries have allowed firms to hire workers on fixed-duration contracts. At the end of a given duration, these contracts can be terminated at little or no cost. If workers are kept on however, the contracts become subject to regular firing costs. We argue in this paper that the effects of such a partial reform of employment protection may be perverse. The main effect may be high turnover in fixed-duration jobs, leading in turn to higher, not lower, unemployment. And, even if unemployment comes down, workers may actually be worse off, going through many spells of unemployment and fixed duration jobs, before obtaining a regular job. Looking at French data for young workers since the early 1980s, we conclude that the reforms have substantially increased turnover, without a substantial reduction in unemployment duration. If anything, their effect on welfare of young workers appears to have been negative.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8219.

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Date of creation: Apr 2001
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Publication status: published as Blanchard, O. and A. Landier. "The Perverse Effects Of Partial Labour Market Reform: Fixed-Term Contracts In France," Economic Journal, 2002, v112(480,Jun), F214-F244.
Handle: RePEc:nbr:nberwo:8219

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  1. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  2. Thierry Magnac & Michael Visser, 1999. "Transition Models With Measurement Errors," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 466-474, August.
  3. Cahuc, Pierre & Postel-Vinay, Fabien, 2001. "Temporary Jobs, Employment Protection and Labor Market Performance," IZA Discussion Papers 260, Institute for the Study of Labor (IZA).
  4. Ricardo J. Caballero & Mohamad L. Hammour, 1996. "The "Fundamental Transformation" in Macroeconomics," NBER Working Papers 5471, National Bureau of Economic Research, Inc.
  5. Fougère, Denis & Kramarz, Francis & Magnac, Thierry, 2000. "Youth Employment Policies In France," CEPR Discussion Papers 2394, C.E.P.R. Discussion Papers.
  6. Maia Güell & Barbara Petrongolo, 2000. "Workers Transitions from Temporary to Permanent Employment: the Spanish Case," CEP Discussion Papers dp0438, Centre for Economic Performance, LSE.
  7. P Adam & P Canziani, 1998. "Partial De-Regulation: Fixed-Term Contracts in Italy and Spain," CEP Discussion Papers dp0386, Centre for Economic Performance, LSE.
  8. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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