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

Abstract

Fixed-term labour contracts (FTCs) may be an important tool to promote employment, particularly in recessions and when dismissal costs of open-ended contracts are high. In this case, making FTCs more flexible during downturns may be useful. We assess this idea by examining the effects of a law that increased the maximum duration of FTCs in Portugal during the 2012 recession. Our analysis is based on regression-discontinuity and difference-in-differences methods and employer-employee panel data. We find a considerable take up of this measure, as conversions to permanent contracts drop by 20%. Worker churning is reduced, as mobility of eligible fixed-term workers to other firms drops by 10%. Employment also increases but only for younger workers.