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

Guest speaker

Pedro Martins (Nova SBE)




Start16.02.2022 11:00End16.02.2022 12:00

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Event summary

Pedro S. Martins is Professor of Economics at Nova SBE. He earned his PhD in Economics from the University of Warwick in 2004. Pedro is a labour economist, having published in several leading journals, including Journal of Labor Economics, American Economic Journal (Macro), European Economic Review, Industrial Relations, and British Journal of Industrial Relations. Some of these studies have been supported by research grants in which he was principal investigator, totalling over €1m since 2015, and draw on collaborations with international organisations, including the European Commission, ILO, IMF, OECD, and World Bank. His approach to research is shaped by his experience in the Government of Portugal (2011-13), when he was responsible for a number of major reforms. This experience influenced his policy and research work around social dialogue and training, and his current work as editor of the IZA Journal of Labor Policy.

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.

Authors: Pierre Cahuc, Pauline Carry, Franck Malherbet and Pedro Martins


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