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Employment Effects of Restricting Fixed-Term Contracts: Theory and Evidence

Author

Listed:
  • Pierre Cahuc

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics, CEPR - Center for Economic Policy Research)

  • Pauline Carry

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique)

  • Franck Malherbet

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics)

  • Pedro S Martins

    (NOVA SBE - NOVA - School of Business and Economics - NOVA - Universidade Nova de Lisboa = NOVA University Lisbon, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics)

Abstract

This paper examines a labor law reform implemented in Portugal in 2009 which restricted the use of fixed-term contracts to reduce labor market segmentation. The reform targeted establishments created by large firms above a specific size threshold, covering about 15% of total employment. Drawing on linked employer-employee longitudinal data and regression discontinuity methods, we find that, while the reform was successful in reducing the number of fixed-term jobs, it did not increase the number of permanent contracts and decreased employment in large firms. However, we find evidence of positive spillovers to small firms that may bias reduced form estimates. To evaluate general equilibrium effects, we build and estimate a directed search and matching model with endogenous number of establishments and jobs. We find spillover effects that induce small biases on reduced form estimates but that significantly change the evaluation of the overall impact of the reform because they diffuse to the whole economy. We estimate that the reform slightly reduced aggregate employment and had negative effects on the welfare of employees and unemployed workers.

Suggested Citation

  • Pierre Cahuc & Pauline Carry & Franck Malherbet & Pedro S Martins, 2022. "Employment Effects of Restricting Fixed-Term Contracts: Theory and Evidence," SciencePo Working papers Main hal-03881622, HAL.
  • Handle: RePEc:hal:spmain:hal-03881622
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03881622
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    Citations

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    Cited by:

    1. Pauline Carry, 2022. "The Effects of the Legal Minimum Working Time on Workers, Firms and the Labor Market," SciencePo Working papers Main hal-04067393, HAL.
    2. Martins, Pedro S., 2022. "The wage effects of employers' associations: A case study of the private schools sector," GLO Discussion Paper Series 1163, Global Labor Organization (GLO).
    3. Carreño Bustos, José Gabo, 2023. "Flexible Contracts as Business Cycle Stabilizers," Discussion Paper 2023-007, Tilburg University, Center for Economic Research.
    4. Jonathan Créchet, 2023. "Risk Sharing in a Dual Labor Market," Working Papers 2307E, University of Ottawa, Department of Economics.
    5. Bottasso, Anna & Bratti, Massimiliano & Cardullo, Gabriele & Conti, Maurizio & Sulis, Giovanni, 2023. "Labor Market Regulation and Firm Adjustments in Skill Demand," IZA Discussion Papers 16262, Institute of Labor Economics (IZA).
    6. Ragnhild Balsvik & Doireann Fitzgerald & Stefanie Haller, 2023. "The Impact of Multinationals along the Job Ladder," CESifo Working Paper Series 10701, CESifo.
    7. Pauline Carry, 2022. "The Effects of the Legal Minimum Working Time on Workers, Firms and the Labor Market," Working Papers hal-04067393, HAL.
    8. Davide Fiaschi & Cristina Tealdi, 2024. "Let's roll back! The challenging task of regulating temporary contracts," Papers 2401.17971, arXiv.org.

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    More about this item

    Keywords

    Directed search and matching; Labour market segmentation; Regression discontinuity;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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