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

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Abstract

In the mid 80.s, many European countries liberalized the use of fixed-term contracts in order to lower firm.s non-wage labor costs, instead of reducing firing costs associated with indefinite duration contracts. This policy generated segmented labor markets, being the Spanish case the most striking with a share of temporary employment of 33% by mid 90.s. Ever since, several reforms have been proposed and in this paper we quantify the effects of some of them. First, we build a model of job creation and destruction of the search and matching type that is able to replicate the main properties of a segmented labor market like the Spanish one. Then, we use this model to quantify the effects of eliminating procedural wages and further reducing firing costs associated with permanent contracts. The main results are: (i) a small increase on permanent job destruction, (ii) a significant reduction of 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 ones.

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Bibliographic Info

Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/18.

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Length: 34 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:cea:doctra:e2004_18

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Keywords: Firing costs; Temporary Employment; Job destruction; Job conversions; Segmented labor markets; job creation.;

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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. Cervini, María & Ramos, Xavier & Silva, José I., 2011. "Wage effects of non-wage labour costs," MPRA Paper 34033, University Library of Munich, Germany.
  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. 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.
  4. Silva, José I. & Vázquez-Grenno, Javier, 2013. "The ins and outs of unemployment in a two-tier labor market," Labour Economics, Elsevier, vol. 24(C), pages 161-169.
  5. University of Pennsylvania & Ludo Visschers, 2007. "Employment Uncertain and Wage Contracts," 2007 Meeting Papers 547, Society for Economic Dynamics.
  6. Hector Sala & José I. Silva, 2005. "The relevance of Post-Match LTC: Why has the Spanish labor market become as volatile as the US one?," Working Papers wpdea0515, Department of Applied Economics at Universitat Autonoma of Barcelona.

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