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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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  • Victoria Osuna Padilla, 2004. "The Effects of Reducing Firing Costs in Spain: a Lost Opportunity?," Economic Working Papers at Centro de Estudios Andaluces E2004/18, Centro de Estudios Andaluces.
    • Handle: RePEc:cea:doctra:e2004_18
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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-Plá, María & Ramos, Xavier & Ignacio Silva, José, 2014. "Wage effects of non-wage labour costs," European Economic Review, Elsevier, vol. 72(C), pages 113-137.
    2. 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, September.
    3. 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.
    4. Ignacio García Pérez, J. & Osuna, Victoria, 2014. "Dual labour markets and the tenure distribution: Reducing severance pay or introducing a single contract," Labour Economics, Elsevier, vol. 29(C), pages 1-13.
    5. Victoria Osuna & José Ignacio García Pérez, 2021. "Temporary layoffs, short-time work and COVID-19: the case of a dual labour market," Applied Economic Analysis, Emerald Group Publishing Limited, vol. 30(90), pages 248-262, December.
    6. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute of Labor Economics (IZA).
    7. University of Pennsylvania & Ludo Visschers, 2007. "Employment Uncertain and Wage Contracts," 2007 Meeting Papers 547, Society for Economic Dynamics.
    8. Makoto Masui, 2013. "Temporary Contracts, Employment Protection, and Collective Bargaining," LABOUR, CEIS, vol. 27(4), pages 371-398, December.
    9. Egbert Jongen & Sabine Visser, 2010. "Exploring the ambiguous impact of employment protection on employment and productivity," CPB Discussion Paper 148, CPB Netherlands Bureau for Economic Policy Analysis.
    10. 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.
    11. Victoria Osuna & J. García-Pérez, 2015. "On the Effectiveness of Short-time Work Schemes in Dual Labor Markets," De Economist, Springer, vol. 163(3), pages 323-351, September.

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    More about this item

    Keywords

    Firing costs; Temporary Employment; Job destruction; Job conversions; Segmented labor markets; job creation.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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