Title

Employment Protection Reforms: From Firm-Level Effects to Aggregate Outcomes

Author(s)

Pierre Cahuc Pierre Cahuc (Sciences Po)

Pauline Carry Pauline Carry (Princeton University)

Franck Malherbet Franck Malherbet (CREST-ENSAE, Ecole Polytechnique)

Pedro S. Martins Pedro Martins (Nova School of Business and Economics)

Abstract

Employment protection legislation often varies with firm or establishment size and age, and many evaluations of EPL reforms exploit these thresholds. This paper develops a search-and-matching model with multi-establishment firms to disentangle direct effects from general-equilibrium spillovers. We combine the model with quasi-experimental evidence from a 2009 Portuguese reform that restricted fixed-term contracts in young establishments of large firms. Spillovers barely distort the reduced-form estimate, yet they overturn the aggregate conclusion: extrapolating the reduced-form estimate implies a 1.51% employment decline, compared with a 0.11% increase in general equilibrium. Counterfactuals show that conditioning EPL on size versus age can yield opposite welfare effects, even when employment effects are similar, and that fixed-term contract and firing restrictions must be evaluated jointly.

Creation Date

2026-09

Section URL ID

Paper Number

666

URL

https://irs.princeton.edu/publications/working-papers/666

File Function

Jel

J68; K31

Keyword(s)

Suppress

false

Series

1