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Employment Effects of Restricting Fixed-Term Contracts: Theory and Evidence

Author

Listed:
  • Cahuc, Pierre
  • Carry, Pauline
  • Malherbet, Franck
  • Martins, Pedro

Abstract

This paper examines a labor law reform implemented in Portugal in 2009 which restricted the use of fixed-term contracts to reduce labor market segmentation. The reform targeted establishments created by large firms above a specific size threshold, covering about 15\% of total employment. Drawing on linked employer-employee longitudinal data and regression discontinuity methods, we find that, while the reform was successful in reducing the number of fixed-term jobs, it did not increase the number of permanent contracts and decreased employment in large firms. However, we find evidence of positive spillovers to small firms that may bias reduced form estimates. To evaluate general equilibrium effects, we build and estimate a directed search and matching model with endogenous number of establishments and jobs. We find spillover effects that induce small biases on reduced form estimates but that significantly change the evaluation of the overall impact of the reform because they diffuse to the whole economy. We estimate that the reform slightly reduced aggregate employment and had negative effects on the welfare of employees and unemployed workers.

Suggested Citation

  • Cahuc, Pierre & Carry, Pauline & Malherbet, Franck & Martins, Pedro, 2022. "Employment Effects of Restricting Fixed-Term Contracts: Theory and Evidence," CEPR Discussion Papers 16875, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16875
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    Cited by:

    1. is not listed on IDEAS
    2. Pauline Carry, 2022. "The Effects of the Legal Minimum Working Time on Workers, Firms and the Labor Market," Sciences Po Economics Publications (main) hal-04067393, HAL.
    3. Jonathan Créchet, 2023. "Risk Sharing in a Dual Labor Market," Working Papers 2307E, University of Ottawa, Department of Economics.
    4. Bottasso, Anna & Bratti, Massimiliano & Cardullo, Gabriele & Conti, Maurizio & Sulis, Giovanni, 2025. "Labor market regulations and firm adjustments in skill demand," Journal of Public Economics, Elsevier, vol. 242(C).
    5. Ragnhild Balsvik & Doireann Fitzgerald & Stefanie Haller, 2023. "The Impact of Multinationals along the Job Ladder," CESifo Working Paper Series 10701, CESifo.
    6. Pijoan-Mas, Josep & Roldan-Blanco, Pau, 2022. "Dual Labor Markets and the Equilibrium Distribution of Firms," CEPR Discussion Papers 17762, C.E.P.R. Discussion Papers.
    7. Davide Fiaschi & Cristina Tealdi, 2024. "Let's roll back! The challenging task of regulating temporary contracts," Papers 2401.17971, arXiv.org.
    8. Créchet, Jonathan, 2024. "A model of risk sharing in a dual labor market," Journal of Monetary Economics, Elsevier, vol. 147(C).
    9. Carreño Bustos, José Gabo, 2023. "Flexible Contracts as Business Cycle Stabilizers," Discussion Paper 2023-007, Tilburg University, Center for Economic Research.
    10. Pauline Carry, 2022. "The Effects of the Legal Minimum Working Time on Workers, Firms and the Labor Market," Working Papers hal-04067393, HAL.
    11. Martins, Pedro S., 2022. "The wage effects of employers' associations: A case study of the private schools sector," GLO Discussion Paper Series 1163, Global Labor Organization (GLO).
    12. Josep Pijoan-Mas & Pau Roldan-Blanco, 2025. "Dual Labor Markets and the Equilibrium Distribution of Firms," Working Papers 1531, Barcelona School of Economics.

    More about this item

    Keywords

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    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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