The Effects of Increasing the Costs of Fixed-Term Contracts on the Dynamics of Labor Demand: An Evaluation of a French Reform

In France, as in most continental European countries, Þxed-term labor contracts (FTC) have a maximum duration. At the end of the contracts, employers must either transform their FTCs into indeÞnite-term contracts (ITC) or terminate the contracts and pay a termination cost to the workers. In January 2002, the costs of terminating Þxed-term contracts increased from 6% to 10% of the total employment value. In this paper, we provide an evaluation of this reform using a panel of about 30,000 establishments followed in 2000, 2001 and 2002 (periods of macro-economic slowdown) with detailed information on their quarterly hiring and Þring behaviors. To identify the impact of the reform on employment, we compare the employment dynamics of ”dead-end” establishments (i.e., those who hire under FTCs, but do not transform their FTCs) with the employment dynamics of the other establishments. By deÞnition ”dead-end” establishments are the most directly impacted by the reform. As a matter of fact, we Þnd that their employment growth rate between 2001 and 2002 is signiÞcantly more negative (-1.2%) than those of the other establishments. We do not Þnd such differences in employment dynamics between 2000 and 2001. To identify the effect of the reform on the rates of transformation of FTCs, we compare the changes in these rates between 2000 and 2001 on the one hand, and between 2001 and 2002 on the other hand. Regarding the Þrst sub-period, we Þnd a decline in the transformation rates, which is consistent with the beginning of the economic slowdown observed between 2000 and 2001. In contrast, we Þnd an increase in transformation rates between 2001 and 2002, in spite of the growing deterioration economic climate. Given the evolution of the macro-economic context, we show that the difference between the two evolutions can be interpreted as a lower bound (i.e., about +3 percent points) for the actual positive impact of the reform on the transformation rates. All in all, the reform has increased the incentive to transform FTC into ITC, at the price of diminishing the level of employment. It seems that a signiÞcant number of ”deadend” jobs have been destroyed by the reform, but they have not been fully replaced by ”stepping stones”.