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

Author

Listed:
  • Cahuc, Pierre

    (Sciences Po, Paris)

  • Carry, Pauline

    (Princeton University)

  • Malherbet, Franck

    (Paris Graduate School of Economics, ENSAE)

  • Martins, Pedro

    (Universidade Nova de Lisboa)

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 fixed-term 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

  • Cahuc, Pierre & Carry, Pauline & Malherbet, Franck & Martins, Pedro, 2026. "Employment Protection Reforms: From Firm-Level Effects to Aggregate Outcomes," IZA Discussion Papers 18909, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18909
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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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