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Asymmetric labour market reforms and wage growth with fixed-term contracts: does learning about match quality matter?

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  • Marta Silva
  • Luis Filipe Martins
  • Helena Lopes

Abstract

Empirical evidence suggests that fixed-term contracts tend to bear the adjustment cost of asymmetric reforms that increase the employment protection gap between fixed-term and open-ended contracts. However, previous studies did not take into account that fixed-term contracts can play different roles in the labour market and therefore the effect of this type of reform is heterogeneous. We estimate an endogenous regime switching model using rich administrative linked employer-employee data to study the impact of a change in Portuguese employment protection legislation that eased regulations on fixed-term contracts. Our results suggest that the implementation of this reform has a negative impact on match quality, proxied by the probability of conversion of fixed-term contracts. However, the conversion of the contract is associated with a significant increase in wage growth and not all fixed-term contracts are evenly affected by this type of reform. Everything else remaining constant, the wage growth of good matches, i.e. converted fixed-term contracts, was less penalised (-0.16 pp.) than that of non-converted fixed-term contracts (-0.55 pp.) in the years in which the changed legislation was in force. The change in legislation contributed to increase the wage growth differential between both groups in approximately 15%.

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  • Marta Silva & Luis Filipe Martins & Helena Lopes, 2015. "Asymmetric labour market reforms and wage growth with fixed-term contracts: does learning about match quality matter?," Working Papers Series 2 15-04, ISCTE-IUL, Business Research Unit (BRU-IUL).
  • Handle: RePEc:isc:iscwp2:bruwp1504
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    More about this item

    Keywords

    Employment Protection Legislation; Fixed-term Contract; Match Quality; Learning; Endogenous Regime Switching Model;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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