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

102 Pages Posted: 19 May 2022

See all articles by Pierre Cahuc

Pierre Cahuc

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE); Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA); University of Angers - French National Center for Scientific Research (CNRS); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Pauline Carry

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

Franck Malherbet

ENSAE; Universite Paris I Pantheon-Sorbonne

Pedro S. Martins

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

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. IZA Discussion Paper No. 14999, Available at SSRN: https://ssrn.com/abstract=4114523 or http://dx.doi.org/10.2139/ssrn.4114523

Pierre Cahuc (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE) ( email )

92245 Malakoff Cedex
France

Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA) ( email )

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Paris Cedex 13, 75647
France
+33 1 4117 3717 (Phone)
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HOME PAGE: http://eurequa.univ-paris1.fr/membres/cahuc/

University of Angers - French National Center for Scientific Research (CNRS)

106-112 Boulevard de l'Hopital
75647 Paris Cedex 13
France
+33 4 44 07 82 06 (Phone)
+33 4 44 07 82 02 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

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

ENSAE ( email )

92245 Malakoff Cedex
France

Universite Paris I Pantheon-Sorbonne

15 Boulevard Gabriel Peri
92245 Malakoff Cedex
France
+33 1 4117 3550 (Phone)
+33 1 4117 7634 (Fax)

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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