We estimate models of labour demand for a panel of 3,400 Spanish manufacturing firms over the period 1985-2001. We examine the roles of fixed-term contracts, financial factors and a policy reform in 1997 affecting permanent contracts by lowering payroll taxes and dismissal costs. Compared with permanent employment, the demand for flexible labour displays: (i) greater sensitivity to financial factors; (ii) greater cyclical sensitivity; (iii) a larger average wage elasticity; and (iv) less inertia. Our analysis of the 1997 policy reform suggests that a 5 percentage point reduction in the payroll tax is associated with an 8% increase in permanent labour demand. Copyright (c) Bank of England, 2007.
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