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In a segmented labor market, theory predicts that employment protection has an asymmetric impact on entry and incumbent wages. We explore a reform that increased the protection of open-ended contracts for a well-defined subset of firms, while leaving it unchanged for other firms. The causal evidence points to a reduction in wages for new open-ended and fixed-term contracts and no impact for more tenured workers. The reductions estimated for entrants oscillate between -0.9 and -0.5 p.p., covering a significant part of the expected increase in firing costs. Firms with larger shares of fixed-term contracts shifted the burden to these workers.

Portuguese firms engage in intense reallocation, most employers simultaneously hire and separate from workers, resulting in high excess worker turnover flows. These flows are constrained by the employment protection gap between open-ended and fixed-term contracts. We explore a reform that increased the employment protection of open-ended contracts and generated a quasi-experiment. The causal evidence points to an increase in the share and in the excess turnover of fixed-term contracts in treated firms. The excess turnover of open-ended contracts remained unchanged. This result is consistent with a high degree of substitution between open-ended and _fixed-term contracts. At the _firm level, we also show that excess turnover is quite heterogeneous and quantify its association with firm, match, and worker characteristics. . info:eu-repo/semantics/publishedVersion