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The Effects of Reducing Firing Costs in Spain: A Lost Opportunity?

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  • Osuna Victoria

    ()
    (Universidad Pablo de Olavide)

Abstract

In the mid 80's, many European countries liberalized the use of fixed-term (temporary) contracts in order to lower firm's non-wage labor costs, instead of reducing firing costs associated with indefinite duration (permanent) contracts. This policy generated segmented labor markets. The Spanish case is the most striking, with a share of temporary employment of 33% by the mid 90's. Since then, several reforms have been suggested and in this paper I quantify some of their effects. First, I build a model of job creation and destruction of the search and matching type that is able to generate the main properties of a segmented labor market like the Spanish one. Then, I use his model to quantify the effects of removing procedural wages, and further reductions in firing costs associated with permanent contracts. The main results are: (i) a small increase in permanent job destruction, (ii) a significant reduction in temporary job destruction, mainly driven by the increase in job conversions from temporary contracts into permanent ones, and (iii) a significant reduction in labor market segmentation measured as the reduction in the wage gap of temporary versus permanent workers.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 5 (2005)
Issue (Month): 1 (May)
Pages: 1-29

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Handle: RePEc:bpj:bejmac:v:contributions.5:y:2005:i:1:n:5

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  1. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
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Cited by:
  1. Silva, José I. & Vázquez-Grenno, Javier, 2012. "The Ins and Outs of Unemployment in a Two-Tier Labor Market," Working Paper Series, Center for Labor Studies 2012:12, Uppsala University, Department of Economics.
  2. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute for the Study of Labor (IZA).
  3. Sala, Hector & Silva, José I., 2005. "The Relevance of Post-Match LTC: Why Has the Spanish Labor Market Become as Volatile as the US One?," IZA Discussion Papers 1823, Institute for the Study of Labor (IZA).
  4. Cervini, María & Ramos, Xavier & Silva, José I., 2011. "Wage effects of non-wage labour costs," MPRA Paper 34033, University Library of Munich, Germany.
  5. Hector Sala & José I. Silva & Manuel Toledo, 2012. "Flexibility at the Margin and Labor Market Volatility in OECD Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 991-1017, 09.
  6. University of Pennsylvania & Ludo Visschers, 2007. "Employment Uncertain and Wage Contracts," 2007 Meeting Papers 547, Society for Economic Dynamics.

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