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Employment Protection Reforms: From Firm-Level Effects to Aggregate Outcomes

Author

Listed:
  • Pierre Cahuc

    (Sciences Po)

  • Pauline Carry

    (Princeton University)

  • Franck Malherbet

    (CREST-ENSAE, Ecole Polytechnique)

  • Pedro S. Martins

    (Nova School of Business and Economics)

Abstract

Employment protection legislation often varies with firm or establishment size and age, and many evaluations of EPL reforms exploit these thresholds. This paper develops a search-and-matching model with multi-establishment firms to disentangle direct effects from general-equilibrium spillovers. We combine the model with quasi-experimental evidence from a 2009 Portuguese reform that restricted fixedterm contracts in young establishments of large firms. Spillovers barely distort the reduced-form estimate, yet they overturn the aggregate conclusion: extrapolating the reduced-form estimate implies a 1.51% employment decline, compared with a 0.11% increase in general equilibrium. Counterfactuals show that conditioning EPL on size versus age can yield opposite welfare effects, even when employment effects are similar, and that fixed-term contract and firing restrictions must be evaluated jointly.

Suggested Citation

  • Pierre Cahuc & Pauline Carry & Franck Malherbet & Pedro S. Martins, 2026. "Employment Protection Reforms: From Firm-Level Effects to Aggregate Outcomes," Working Papers 2026-09, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2026-09
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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