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

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Abstract/Contents

Abstract: This paper examines a labor law reform implemented in Portugal in 2009 which restricted the use of fixed-term contracts in establishments created by large firms above a specific size threshold, covering about 10% of total employment. Drawing on linked employer-employee longitudinal data and regression discontinuity methods, we nd 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 nd 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.

Type of resource	text
Date created	September 1, 2021

Subject	directed search and matching
Subject	labor market segmentation
Subject	regression discontinuity
Genre	Text
Genre	Working paper
Genre	Grey literature

DOI	https://doi.org/10.25740/sx325dw0530
Location	https://purl.stanford.edu/sx325dw0530

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License: This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).

Preferred citation: Cahuc, P., Carry, P., Malherbet, F., and Martins, P. (2022). Employment Effects of Restricting Fixed-Term Contracts: Theory and Evidence. Stanford Digital Repository. Available at https://purl.stanford.edu/sx325dw0530

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