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Should the Maximum Duration of Fixed-Term Contracts Increase in Recessions? Evidence from a Law Reform

Listed author(s):
  • Martins, Pedro S.

    ()

    (Queen Mary, University of London)

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%.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10206.

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Length: 27 pages
Date of creation: Sep 2016
Handle: RePEc:iza:izadps:dp10206
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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. Pedro S. Martins, 2016. "Can overtime premium flexibility promote employment? Firm- and worker-level evidence from a labour law reform," Working Papers 72, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  3. Marcus Hagedorn & Iourii Manovskii & Kurt Mitman, 2015. "The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle?," NBER Working Papers 20884, National Bureau of Economic Research, Inc.
  4. Pedro Martins & Andy Snell & Heiko Stueber & Jonathan Thomas, 2016. "Bias in Returns to Tenure When Firm Wages and Employment Comove: A Quantitative Assessment and Solution," Working Papers 64, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  5. Alexander Hijzen & Pedro S. Martins, 2016. "No Extension without Representation? Evidence from a Natural Experiment in Collective Bargaining," Working Papers 68, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  6. 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, 03.
  7. 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.
  8. Martins, Pedro S. & Pessoa e Costa, Sofia, 2014. "Reemployment and Substitution Effects from Increased Activation: Evidence from Times of Crisis," IZA Discussion Papers 8600, Institute for the Study of Labor (IZA).
  9. 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, 04.
  10. 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.
  11. 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.
  12. Martins, Pedro S., 2014. "30,000 Minimum Wages: The Economic Effects of Collective Bargaining Extensions," IZA Discussion Papers 8540, Institute for the Study of Labor (IZA).
  13. Pedro S. Martins, 2008. "Worker churning and firms' wage policies," International Journal of Manpower, Emerald Group Publishing, vol. 29(1), pages 48-63, March.
  14. 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.
  15. Renato Faccini, 2014. "Reassessing Labour Market Reforms: Temporary Contracts as a Screening Device," Economic Journal, Royal Economic Society, vol. 124(575), pages 167-200, 03.
  16. 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.
  17. 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.
  18. 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.
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