Should the maximum duration of fixed-term contracts increase in recessions? Evidence from a law reform.- Pedro S. Martins

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  • Last update: 06 September 2016
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  • Version: September 6th, 2016
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  • Author: Pedro S. Martins


Fixed-term contracts (FTCs) may be an important tool to promote hirings and employment,
particularly in recessions or when permanent contracts are costly. Therefore,
it may be useful to let some of the legal parameters of FTCs (as well as those of other
labour market institutions) vary systematically over the business cycle, namely increasing
their exibility during downturns. We evaluate this idea by examining the short-term
e ects of a new law introduced in Portugal, in the midst of a recession, which increased
the maximum duration of FTCs from three to four and a half years. Our analysis is based
on regression-discontinuity (and di erence-in-di erences) methods, applied to matched
panel data. We nd a considerable take up of this measure, as conversions to permanent
contracts drop by 20%. Moreover, while we do not detect signi cant e ects on employment
status in the subsequent year, worker churning is reduced signi cantly, as mobility
of eligible xed-term workers to other rms drops by 10%.

Keywords: Employment law, worker mobility, segmentation, counterfactual evaluation