Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain
Economic Inquiry, 52 (April 2014), 930-957.
28 Pages Posted: 5 Jul 1999 Last revised: 30 Oct 2016
Date Written: April 1, 2014
This paper evaluates the effects on employment, job turnover and productivity of a labor market reform in Spain that eliminated dismissal costs for fixed-term or temporary contracts. Our empirical results are based on a panel of 2356 Spanish manufacturing firms for the period 1982-1993. We postulate and estimate a dynamic labor demand model with indefinite and fixed-term labor contracts, and a general structure of labor adjustment costs. Experiments using the estimated model show important positive effects of the reform on total employment (i.e., a 3.5% increase) and job turnover. There is a strong substitution of permanent by temporary workers (i.e., a 10% decline in permanent employment). The effects on labor productivity and the value of a firm are very small. These effects contrast with the ones of a counterfactual reform consisting in halving firing costs of all type of contracts. That policy implies the same increase in total employment, but much larger improvements in productivity, and the value of firms.
Keywords: Labor demand, Firing costs, Temporary contracts, Estimation of dynamic structural models
JEL Classification: J23, J32, J38, J41
Suggested Citation: Suggested Citation