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

103 Pages Posted: 4 Feb 2022

See all articles by Pierre Cahuc

Pierre Cahuc

Ecole Polytechnique, Paris

Pauline Carry

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Franck Malherbet

Université de Rouen

Pedro S. Martins

IZA Institute of Labor Economics; Global Labor Organization (GLO); Nova School of Business and Economics

Date Written: January 1, 2022

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.

Keywords: Directed search and matching, Labor market segmentation, Regression Discontinuity

JEL Classification: J23, J41, J63

Suggested Citation

Cahuc, Pierre and Carry, Pauline and Malherbet, Franck and Martins, Pedro S., Employment Effects of Restricting Fixed-Term Contracts: Theory and Evidence (January 1, 2022). CEPR Discussion Paper No. DP16875, Available at SSRN: https://ssrn.com/abstract=4026759

Pierre Cahuc (Contact Author)

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

Pauline Carry

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Franck Malherbet

Université de Rouen ( email )

Rouen
France

Pedro S. Martins

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Global Labor Organization (GLO) ( email )

Collogne
Germany

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

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