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

Pierre Cahuc, Pauline Carry, Franck Malherbet and Pedro Martins

No 26238, RFBerlin Discussion Paper Series from ROCKWOOL Foundation Berlin (RFBerlin)

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.

Keywords: Employment protection legislation; general-equilibrium spillovers; fixed-term contracts; contingent regulation; directed search; structural estimation. (search for similar items in EconPapers)
JEL-codes: C54 E24 J41 J63 J68 (search for similar items in EconPapers)
Date: 2026-09
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