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Does tightening the duration of temporary contracts cost jobs? Evidence from Germany

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  • Brüll, Eduard

Abstract

Many countries limit how long a worker may be kept on a temporary contract, yet little is known about how firms and workers respond when this maximum duration is tightened. Does a shorter cap simply displace temporary jobs, or does it push firms towards permanent hiring? I provide causal evidence on this duration margin using a 2001 German reform that restricted temporary contracts longer than two years in previously exempt small firms. Using difference-in-differences combined with propensity-score matching, I find that new jobs became around five percentage points more likely to start with a permanent contract, that contract durations bunched at the cap, and that overall employment was not adversely affected. Once the first capped contracts matured, turnover of short-tenure workers rose by a third to a half, but conversions to permanent contracts dominated this churn margin, and post-reform labour-market entrants saw higher early-career earnings and job stability. The findings speak directly to the current debate over lengthening such caps, including Germany's plan to double its own from two to four years.

Suggested Citation

  • Brüll, Eduard, 2026. "Does tightening the duration of temporary contracts cost jobs? Evidence from Germany," ZEW Discussion Papers 26-026, ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:341996
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    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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