Employment Protection and Fixed Term Contracts: Evidence from a German Reform

Eduard Brüll

Abstract:

Governments across Europe have liberalized temporary labor contracts to stimulate employment. However, due to worries about the long-term outcomes of these reforms, there are several recent policy proposals advocating renewed restrictions of fixed-term employment. This paper evaluates the effects of a 2001 reform in Germany, which has changed the ability of smaller firms to establish fixed-term contracts. After the reform hiring employees on temporary contracts became relatively harder for plants below the employment protection threshold of 5 employees. Using a basic differences-in-differences approach that compares plants below and above the official employment protection threshold, I find that the reform has led to a decrease in the use of fixed-term contracts by small plants but has not markedly changed their employment behavior. Furthermore, for post-reform labor market entrants who joined affected plants, I note an increase in cumulated wages and a reduction in the time out of work in the first 5 years as well as suggestive evidence that implies a reduced likelihood to remain fixed-term employed.