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Should the maximum duration of fixed-term contracts increase in recessions? Evidence from a law reform

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  • Pedro S. Martins

Abstract

Fixed-term contracts (FTCs) may be an important tool to promote hirings and employment, particularly in recessions or when permanent contracts are costly. Therefore, it may be useful to let some of the legal parameters of FTCs (as well as those of other labour market institutions) vary systematically over the business cycle, namely increasing their flexibility during downturns. We evaluate this idea by examining the short-term effects of a new law introduced in Portugal, in the midst of a recession, which increased the maximum duration of FTCs from three to four and a half years. Our analysis is based on regression-discontinuity (and difference-in-differences) methods, applied to matched panel data. We find a considerable take up of this measure, as conversions to permanent contracts drop by 20%. Moreover, while we do not detect significant effects on employment status in the subsequent year, worker churning is reduced significantly, as mobility of eligible fixed-term workers to other firms drops by 10%.

Suggested Citation

  • Pedro S. Martins, 2016. "Should the maximum duration of fixed-term contracts increase in recessions? Evidence from a law reform," Working Papers 73, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  • Handle: RePEc:cgs:wpaper:73
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    References listed on IDEAS

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    1. J. Ignacio García-Pérez & Ioana Marinescu & Judit Vall Castello, 2014. "Can Fixed-Term Contracts Put Low Skilled Youth on a Better Career Path? Evidence from Spain," Working Papers 2014-08, FEDEA.
    2. J. Ignacio García-Pérez & Ioana Marinescu & Judit Vall Castello, 2014. "Can Fixed-Term Contracts Put Low Skilled Youth on a Better Career Path? Evidence from Spain," Working Papers 2014-08, FEDEA.
    3. Andy Snell & Pedro Martins & Heiko Stüber & Jonathan P. Thomas, 2018. "Bias in Returns to Tenure When Firm Wages and Employment Comove: A Quantitative Assessment and Solution," Journal of Labor Economics, University of Chicago Press, vol. 36(1), pages 47-74.
    4. Hijzen, Alexander & Martins, Pedro S., 2016. "No Extension Without Representation? Evidence from a Natural Experiment in Collective Bargaining," IZA Discussion Papers 10204, Institute for the Study of Labor (IZA).
    5. Pedro S. Martins & Sofia Pessoa e Costa, 2014. "Reemployment effects from increased activation: Evidence from times of crisis," Working Papers 52, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    6. Pedro S. Martins & Sofia Pessoa e Costa, 2014. "Reemployment and Substitution Effects from Increased Activation: Evidence from Times of Crisis," FEUNL Working Paper Series wp590, Universidade Nova de Lisboa, Faculdade de Economia.
    7. Renato Faccini, 2008. "Reassessing Labor Market Reforms: Temporary Contracts as a Screening Device," Economics Working Papers ECO2008/27, European University Institute.
    8. Pedro S. Martins, 2016. "Can overtime premium flexibility promote employment? Firm-and worker-level evidence from a labour law reform," FEUNL Working Paper Series wp607, Universidade Nova de Lisboa, Faculdade de Economia.
    9. Andrea Ichino & Regina T. Riphahn, 2005. "The Effect of Employment Protection on Worker Effort: Absenteeism During and After Probation," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 120-143, March.
    10. Pedro S. Martins, 2009. "Dismissals for Cause: The Difference That Just Eight Paragraphs Can Make," Journal of Labor Economics, University of Chicago Press, vol. 27(2), pages 257-279, April.
    11. Centeno, Mário & Novo, Álvaro A., 2012. "Excess worker turnover and fixed-term contracts: Causal evidence in a two-tier system," Labour Economics, Elsevier, vol. 19(3), pages 320-328.
    12. Damas de Matos, Ana & Parent, Daniel, 2016. "Which firms create fixed-term employment? Evidence from Portugal," Labour Economics, Elsevier, vol. 41(C), pages 348-362.
    13. Pedro S. Martins, 2014. "30,000 Minimum Wages: The Economic Effects of Collective Bargaining Extensions," FEUNL Working Paper Series wp589, Universidade Nova de Lisboa, Faculdade de Economia.
    14. Kurt Mitman & Iourii Manovskii & Marcus Hagedorn, 2015. "The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle?," 2015 Meeting Papers 1318, Society for Economic Dynamics.
    15. Pedro Portugal & José Varejão, 2010. "The Hidden Side of Temporary Employment: Fixed-term Contracts as a Screening Device," Working Papers w201029, Banco de Portugal, Economics and Research Department.
    16. Pedro S. Martins, 2014. "30,000 minimum wages: The economic effects of collective agreement extensions," Working Papers 51, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    17. Kurt Mitman & Iourii Manovskii & Marcus Hagedorn, 2015. "The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle?," 2015 Meeting Papers 1318, Society for Economic Dynamics.
    18. Pedro S. Martins, 2008. "Worker churning and firms' wage policies," International Journal of Manpower, Emerald Group Publishing, vol. 29(1), pages 48-63, March.
    19. O Blanchard & A Landier, 2002. "The Perverse Effects of Partial Labour Market Reform: fixed--Term Contracts in France," Economic Journal, Royal Economic Society, vol. 112(480), pages 214-244, June.
    20. Renato Faccini, 2014. "Reassessing Labour Market Reforms: Temporary Contracts as a Screening Device," Economic Journal, Royal Economic Society, vol. 124(575), pages 167-200, March.
    21. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-209, January.
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    Cited by:

    1. Martins, Pedro S., 2016. "Should the Maximum Duration of Fixed-Term Contracts Increase in Recessions? Evidence from a Law Reform," IZA Discussion Papers 10206, Institute for the Study of Labor (IZA).
    2. Sanghamitra Bandyopadhyay, 2016. "The persistence of inequality across Indian states," CSAE Working Paper Series 2016-26, Centre for the Study of African Economies, University of Oxford.
    3. Pedro S. Martins, 2016. "Employment Resilience through Services Exports? Evidence from Matched Employer-Employee Data," Working Papers 79, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    4. Pedro S. Martins, 2016. "The third worker: Assessing the trade-off between employees and contractors," Working Papers 75, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    5. Pedro S. Martins, 2016. "Can overtime premium flexibility promote employment? Firm-and worker-level evidence from a labour law reform," FEUNL Working Paper Series wp607, Universidade Nova de Lisboa, Faculdade de Economia.
    6. Martins, Pedro S., 2017. "Economic effects of overtime premium flexibility: Firm- and worker-level evidence from a law reform," GLO Discussion Paper Series 102, Global Labor Organization (GLO).
    7. Gimenez-Nadal, Jose Ignacio & Sevilla, Almudena, 2016. "Intensive Mothering and Well-being: The Role of Education and Child Care Activity," MPRA Paper 74249, University Library of Munich, Germany.

    More about this item

    Keywords

    Employment law; worker mobility; segmentation; counterfactual evaluation;

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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